How to Set a Marketing Budget
I’m a big fan of effective budgeting. I don’t mean the old “use last year’s numbers and stick it in a drawer until next year” type of budgeting, but real world, data based, flexible budgeting, the kind your entire profit plan is built around, the kind that, when done right and used effectively, would at least double and often triple the profit levels of most small businesses. However, I find that many times people get tripped up on their marketing costs.
On one hand, marketing is an expense that needs to be controlled, just like all of your other expenses. On the other hand, marketing is an investment, and the more you spend, the more you make. Should your marketing costs be firmly budgeted, or should they be maximized for the greatest amount of sales in the shortest period of time?
Maximizing Marketing ROI
There’s no room for guessing here. If you measure all the key aspects of your marketing, and you know, with certainty, exactly what your marketing return on investment (ROI) is, and you know your marketing generates a real profit, then your marketing costs should be approached very differently from the rest of your expenses.
In this case, you KNOW that every time you spend a marketing dollar, for example, you get $2.00 back. Why would you want to limit yourself to $1000 when you could spend $100,000, or $1,000,000, or $10,000,000 and make that much more money? When you’ve got a strong ROI, you’ve still got limitations. In this case, you would limit your marketing budget based on your ability to cash flow the costs, your production capacity, and your ability to handle both known and unknown risks. For example, in 2005 investors were making fortunes flipping properties – until the market changed.
Trial and Error
Many small businesses, however, do not have their marketing machine this finely tuned. I was speaking with one of my clients last week, and when I asked her about her marketing efforts, she described the various ads she was running. When I asked her which ad was most effective, she told me she didn’t know, because “that sort of thing is very difficult to track in this industry.”
If that sounds familiar, let me make 2 things very clear:
- If you pay for advertising, you cannot afford ignorance about your marketing results, and
- Without a system for measuring results, tracking things like this is very difficult in every industry.
We’ll look at some simple ways for tracking advertising results in a later post. For the purposes of this budgeting discussion, I just want you to understand that spending money on advertising when you don’t know your ROI is one of the most common reasons businesses make so little profit.
If your business is in this position, here’s what you need to do:
- Freeze your marketing budget right were it is. Don’t cancel your current advertising, and don’t spend even one more penny on additional advertising, no matter how much of a great deal it is that expires by the close of business tomorrow.
- Put a plan in place, with a short deadline, to test and track your results. If you don’t know how, then bring in someone who does know how for some temporary help. If you do know how, then why haven’t you done this already? Most likely, it’s because you’re working so hard that you don’t have the time. If that’s the case, you need to bring in someone who does know how for some temporary help.
- Set a maximum marketing expense as part of a comprehensive budgeting process, and stick to it. This amount should be no more than you are currently spending, and in most cases should be less. It should be low enough that, unless you are a recent start-up, should allow you to show at least a small net profit. When it’s time to to test another advertising medium, pay for it by eliminating something already in your budget.
- Once you know your average ROI, use it. This becomes your benchmark. Change or eliminate the peices that provide the worst ROI, and replace them with something better. Over time, your average ROI will improve, making you more and more profitable.