Determining the Optimal Marketing Budget, the Bonsai way
Here’s the deal - Marketing is crucial in both accessing and assessing, your consumer base. You may be offering the world the most revolutionary product or service, but no one will ever know about it if you don’t tell them. On the flip side, you could be going full steam with your marketing efforts, shouting from the mountaintops to anyone who will listen, and wasting tons of money with little return. In the modern digital space, marketing is just as much about reaching your audience as it is constantly learning how to reach them better. The optimal marketing budget for any brand product or service involves not just how much to spend, but when, and where to spend.
So, if you’re struggling to provide a proper forecast of your budget for the upcoming fiscal year, remember these tips for determining the optimal marketing budget.
Your marketing goals are highly dependent on your particular organization and industry. When digital marketing agencies, like Bonsai Media Group, sit down with clients the work we do is to quantify goals. Ultimately, the goal of MOST marketing efforts is to get the attention of the public and have them take the desired action. When determining goals with our clients, the desired action breaks down into a dollar value and ultimately the value of the average customer or purchase. Once you know that number, it becomes easier to determine how much your willing to pay to acquire the customer, which brings us to the 1st Commandment of budget determination - Cost Per Acquisition [CPA] - i.e. the average marketing cost to acquire one purchase or customer.
Broad unmeasurable goals might be the jumping off place, but in determining marketing budgets, we want goals to be quantifiable. The first step in quantifying those goals is to calculate your average CPA and determine ways, if any, to bring that number down, thus increasing the spread of your budget. After that, comes revenue calculation.
This sounds obvious, but the amount to spend on marketing can only be determined if you know how much you already have. If you are so fortunate as to have a CFO, financial department, or accountant, then you’re already well acquainted with the content in this section, but if you’re a smaller shop, a good rule of thumb for most organizations is to stick to the 10% rule. Allocating at least 10% of your revenue towards marketing efforts is a healthy balance, but remember, this is just a guideline.
In 2017, the average for most organizations’ was around 12%, and that’s spread out wildly across different industries -
- Education: 18.5%
- Consumer services: 17.4%
- Transportation: 11.2%
- Consumer Packaged Goods: 11%
- Service Consulting: 9.4%
- Tech/Software/Biotech: 8.5%
- Communications/Media: 6.6%
- Healthcare: 6.2%
- Banking/Finance/Insurance: 3.9%
- Retail/Wholesale: 3.8%
- Energy: 2.2%
- Mining/Construction: 2%
*taken from the CMO Survey August 2017
Perhaps those sectors that dip below the 5 number should be thinking differently, but that’s a topic for another post.
Furthermore, the U.S. Small Business Administration offers recommended marketing budgets of 7%-8% for small businesses with revenues of less than $5-million and profit margins of 10%-12%.
Budgeting by percentage is incredibly effective, however, is a tough fit for brand new businesses that may not yet be able to accurately or confidently estimate revenue, so obviously, the amount of your revenue you put towards marketing isn’t a one-size-fits-all solution.
Budget vs Spend
Another important aspect of revenue allocation is the understanding of budget vs. spend. Your budget is the total costs to execute your marketing goals, Spend is the amount it takes to acquire certain marketing placements. The budget may encompass the cost of employees, services, or software, whereas spend is an amount allocated to actually reaching the public with your messaging. Spend is an aspect of the budget and not the other way around.
As we mentioned above, the average revenue allocation for most business in 2017 was around 12%. By contrast, the average marketing spend as a percentage of revenue was just under 7%.
Understanding that gap between budget and spend is an ongoing calculation that’s crucial to your overall revenue allocation, and of course where that money goes affects the spend in a number of ways. And just like revenue calculation, the breakdown of budget vs spend really depends on your goals and your organization, but understanding these two numbers is crucial.
Side Note - Fixed budgets
Rather than forecasting for the future, many new businesses can only account for cash on hand. In such circumstances, a fixed dollar amount can often be safer way to create a budget.
The SBA divides marketing costs into two categories: brand development costs and the costs of promoting your business.
Because a fixed budget is exactly that–fixed–it’s important to be thorough in planning how it will be utilized. Return to your goals and make sure they’re quantifiable and specific. What is the best campaign to reach those goals: SEO marketing; promotional event; print ad? Fixed marketing budgets are best reverse engineered.
Got the Budget, But Not a Place to Put it?
Though the results of any marketing campaign and budget will vary from business to business, you don’t have to shoot totally blind.
A recent survey of 2,510 email marketers showed that email, social media, and SEO marketing campaigns all yield the highest ROI. So, if you’ve secured that marketing budget and you're tasked with stretching those dollars as far as they can go in the digital space, you’d better start crafting some ironclad SEO, email, and SMM strategies, which we can help with of course.
Any investment carries risks, but when budgeting for and planning marketing, those risks increase. With most investments, the risk assumed is that the investment won’t generate increased revenue. At worst an investment will fail to cover its own costs.
With marketing, however, a business takes on an added risk of damaging the brand image and decreasing revenue.
What do we mean?
The clearest example of how a bad marketing campaign can cost a brand beyond the budget investment comes from beverage giant Pepsi. Remember their very quickly pulled ad featuring Kendall Jenner diffusing a tense protest by proffering a can of Pepsi to police officers? If you do, it’s probably for the broad and harsh criticism it suffered.
The wrong marketing or ad campaign can do more damage even than failing to generate revenue, remember that.
A given marketing campaign might a one-off, but any successful business should constantly be budgeting for marketing. For that reason, it’s essential you develop a way to measure your investment and its results.
Measuring the input and output of your marketing plans and budget will allow you to hone in on what works and what doesn’t. Over time you can put that data to into practice, refining the efficacy of your marketing budgets and campaigns.
Again it all comes back to CPA. How much does it cost for you to acquire customers? How are you going to get that number down?
How are you going to even begin to answer these questions without a solid way to measure results? Luckily, almost all digital channels these days have built-in analytics, and if you're not using GA, you’d better close this blog post immediately and install it on your site, pronto.
Optimization and Continued Performance
If you’re just starting out, though, what is the most effective way to maximize your marketing budget? If you look purely at the numbers, SEO provides one of the most worthwhile long-term investments. Unlike one-time promotions, ad-runs, or email campaigns, SEO, if done right, is the gift that keeps on giving.
Trends show that most companies have increased digital marketing spend by double-digit percentages each year since 2011 and that trend shows no sign now of slowing down. But, remember, there is no standard marketing budget, there’s only what’s right for you and your organization. No - this post isn’t a magic calculator that’ll spit out a nice shiny number, but these tips are more than useful when starting to think about pitching a monthly or annual marketing budget.