Year-ends are usually times of reflections and planning. Setting next year’s marketing budget follows the same process: looking back at this year’s accomplishments and defining next year’s goals and resources.
“What should the marketing budget look like next year?”
That’s the big question for which there is no easy answer.
Coming up with a marketing budget is just half the battle. Getting it approved by senior management requires a well-planned strategy.
Look at The Big Picture
Setting a marketing budget begins with answering a few questions:
- What are the major strategic goals for next year? How many of them can I realistically accomplish?
- Who is my target audience? What are the best communication methods to reach them? What is their level of brand loyalty?
- How difficult is it to reach my target audience? How easy it is to track their actions and reactions?
- Is the category my brand operates in highly competitive, with many brands fighting for market share?
- How strong is the competition? How aggressive is my competitors’ marketing?
- What is the budget amount the management team feel comfortable with? (I realize that in some cases this is difficult to assess, but there are ways to do it. Look at past years’ approved budget and have preliminary discussions about their vision and plans for next year.)
How to Set Your Marketing Budget
Below are some of the options you can use to come up with the optimal amount for your next year’s marketing expenditures.
A Percentage of Revenue
Many companies set their marketing budgets by allocating between 1% and 10% of their revenues to marketing.
This method assumes a direct relationship between revenue generation and marketing. In many instances this is not the case.
For example, launching a new brand usually requires important marketing resources, while the revenue it generates is zero.
Check out this 2011 report for some insight on the advertising expenditure as a percentage of sales in various industries.
Marketing Budget History
A detailed look at last years’ budgets versus the accomplished goals offers marketers a good idea of where they need to be in the year to come. If the management team is happy with the accomplishments then these budgets represent a solid starting point for next year.
If major strategic changes are to be implemented then previous budgets might not be relevant. This is also the case for new companies (brands) with no marketing budget history.
One simple way to set the budget is to tally up the costs of all marketing activities planned for next year. The total amount gives you the market budget for next year.
One thing to keep in mind is that obtaining accurate costing from various vendors in advance might be challenging. Another downside is that this method does not offer much room for adjustments in the strategy during the year.
Matching what your competitors are spending is another way of establishing your marketing budget. The assumption here is that if you want to remain competitive you have spend as much as them.
There are a few challenges here. Firstly this information might be difficult to find, depending on the industry. Moreover, there is no way to know if the number made public is accurate or not. And thirdly, you might be able to use your budget more efficiently, and get more done with less money.
This method is more popular than you might think. Used mostly by companies for which Marketing is an afterthought, this methods follows no plan and requires no justification. In this case the Management team (or the owner of the business) randomly picks up a number he/she is comfortable with.
This method inhibits any strategic thinking and planning. My advice is to avoid it if you can.
A Hybrid Method
My favorite method makes use of many principles outlined above to come up with a realistic marketing budget.
This approach takes into account the business as an whole, rather than the specific needs of an individual department. It also looks at the competition and, most importantly, how much you can realistically afford to spend.
Setting the Marketing Budget: Track Every Penny
There are some many ways to spend your marketing dollars, depending on your marketing goals. One thing is certain: it’s much easier to set a marketing budget and justify it if you are able to track the effectiveness of its allocation.
I personally review the dollar amount spent on each project against its goals.
The other thing I do is not rush to conclusions: I give each new marketing initiative at least 2 to 3 years to justify its existence. Some tools, such as social media and e-mail marketing are a try, learn and adjust process, that need time to prove their effectiveness.
Some initiatives are easier to track than other. However you should do your best to measure the actual performance against the expected results.
I am interested in learning about the method(s) you use to set your marketing budget.