In November and December, one of the most frequently asked questions I get is how to plan your marketing budget for the next year. Most SMBs I see plan their marketing budget in one of two ways:
- Use Last Year’s Budget (give or take a little)
- There is No Budget (approve things as they come up)
While “doing what you’ve always done” or “figuring out as you go” may be your current method, there are several budgeting methods that are more effective:
- Based on ROI Data and Goals
- Based on a Marketing Plan (outlined activities and their costs)
- Percentage of Revenue
- Using a prior year’s budget
Let’s dig into each method to see which one might make the most sense for your business.
Budgeting Based on ROI Data and Goals
Ideally, you will know how much money you need to put into your marketing to get expected results. Using that data, you can set your marketing budget to match your target growth plans. The challenge with this method is that most SMBs do not have concrete data on which to base those decisions. This data is only possible after you have set up detailed tracking mechanisms to understand your return on investment (ROI) for various marketing activities. The process can take about a year to spin up, test and optimize.
Using a Marketing Plan
Without historical data, the next best option is to base your budget on a marketing plan. What are the planned activities that you will be implementing over the next year to help meet your goals, and what will they cost? You should also be looking at the expected results and target ROI of these activities. Starting with a plan is great, but without measuring the outcome and effect on your goals to understand your ROI isn’t much more efficient than using last year’s budget and hoping for the best.
Percentage of Revenue
If you don’t have historical data or a marketing plan, I would suggest looking for some industry benchmarks. Almost every industry will have information on marketing budgets as a percentage of revenue. Be warned, most business owners who are operating without a marketing budget will balk when they see the recommended number. Look at it as a target.
Using the Prior Year’s Marketing Budget
Using a prior year’s budget as a starting place will only work if the following conditions are true:
- none of the marketing expenses will change from year to year
- none of the platforms, mediums, or tactics you are using will need to adjust
- you are hitting your growth goals consistently
- and you don’t require any infrastructure changes (branding updates, major website changes, new products, or sales materials)
I haven’t seen very many companies that can just coast with the same marketing from year to year, but this is the most common budgeting practice that I see in use, probably because it is the easy button approach. The problem is that the results usually follow suit – not that remarkable.
While this article may help you determine which method to use, putting together a marketing plan and creating a marketing budget requires significant industry expertise. Without that experience, these activities can be daunting for most business owners. Even among businesses with $15-50 million in annual revenue, most don’t have any marketing leadership on their team. This probably accounts for why it’s rare for most SMBs to have a concrete marketing plan or budget. It’s wise to enlist some expert help if you want to be confident in your marketing plan. You can find marketing consultants and fractional CMOs who can help you.
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