Consider the following scenario: you’re the owner of a small-to-medium business (SMB), and you’re struggling to determine how much you should spend on marketing. Not only do you have no idea what the ideal marketing budget looks like, but you also don’t know of an effective method you can use to determine what your marketing budget should be.
Perhaps it should because if you’re like a lot of your business owner peers, you’ve probably found yourself in a similar scenario at least once in your career.
And it’s no surprise then that as a marketing agency that primarily works with SMBs, we get questions about marketing budgets all the time. Read on for a discussion of two approaches to budgeting that you might be able to use for your small business, as well as a few common issues that may come up when determining the marketing budget for an SMB.
The ‘Percentage of Operating Budget’ Approach
The ‘percentage of operating budget’ approach is as straightforward as it sounds. If your business has an annual operating budget of $1 million, and you set the total marketing spend at 5% of the overall budget, you will end up with $50,000 to spend on your marketing for the year. This math works the same way when basing the calculation on revenues. Easy, right?
But depending on the unique set of challenges facing your business, this simple approach might be too easy. For one thing, this approach completely ignores what you’re trying to accomplish with that marketing budget. Using a simple percentage to determine your budget is pretty arbitrary.
Average Marketing Budget Data Exists
That’s not to say that there’s a lot of easy-to-find information out there regarding average marketing budgets for companies competing in various industries. A recent article on the HubSpot blog cites a 2020 Gartner study that claims to have determined the “typical marketing budget is approximately 11% of the company-wide budget.”
On a percentage of revenue basis, the same HubSpot article cites a recommendation from the U.S. Small Business Administration (SBA) that advises “small businesses (businesses with revenue less than $5 million) allocate between 7% and 8% of total revenue to marketing — assuming your business has margins in the range of 10-12 percent.”
While the data collection and analysis methods used to develop the marketing budget statistics cited above may have been fundamentally sound, the actual percentages may not be entirely relevant to your business. For example, what if you run a small B2C company in a very competitive industry where a couple of established players own the vast majority of the market share? If your goal is to grow, then you might have to invest heavily in marketing to take market share away from your more established competitors. And what if you’re a start-up? It will be pretty difficult to calculate a marketing budget using the percentage of revenue method if you don’t have any significant sales yet!
The bottom line is this simple, mathematical approach to budgeting works best for established companies competing in mature industries where there isn’t much change and disruption. However, most businesses don’t have the luxury of operating in a stable industry with established players and predictable outcomes. In the modern-day economy, change and disruption rule the day, and it happens at a far faster pace than ever before. Even in a well-established industry, there will still be opportunities that pop up from time to time that may force you to simply adjust, be it your tactics, your budgets, or all of the above.
Most companies will need to take a more rigorous approach than the ‘percentage of…’ method described above when budgeting because that overly simple method completely ignores the real-world challenges and opportunities facing a company. An arbitrary number based on a set percentage doesn’t consider where the company currently stands, nor does it consider the goals of the company’s leadership.
For most companies, we recommend a more thorough budgeting process with five basic steps:
- Establishing a Baseline – An honest assessment of where your company is now
- Identifying SMART Goals – Where do you want to go
- Setting the Marketing Strategy – How does marketing help me achieve my goals
- Determining the Budget – How much will it cost to execute the strategy
- Execute, Evaluate, Adjust, Repeat – Budget what your constraints allow, execute the strategy, evaluate the results, then repeat
Let’s briefly go through each of the five steps.
Establishing a Baseline
We recently published an article about where a company should start when working with a newly hired marketing agency. The big takeaway? Start with an honest assessment of your business, identifying where you are now (brutal honesty is the best policy here) and where you may want to go. One of the most common techniques used in business to establish a baseline is the tried and true SWOT analysis where the organization identifies its strengths, weaknesses, opportunities, and threats. Using the SWOT framework and process, you will be able to identify some goals for your company — goals that you will need a marketing budget to achieve.
Identifying SMART Goals
The phrase “SMART Goals” first entered the corporate lexicon in the early 1980s and became more widely known thanks to the management guru Peter Drucker. SMART Goals are all about the alignment of corporate resources (including talent, tools, funding, and other resources) to achieve a specific, measurable outcome. Ideally, utilizing the SMART Goal framework will help your company (or a specific team, or even an individual) work more productively and achieve better results.
It’s based on the mnemonic acronym “S.M.A.R.T.” which stands for:
What It Means to Be SMART
To illustrate how SMART Goals work, consider the following goal: “I want to lose a lot of weight.” That’s a great goal to have, right? I’m sure that many of us feel like we could stand to lose a few pounds (especially post-COVID). Unfortunately, stating your goal in that way means it’s almost doomed to fail. Here’s why:
- It’s not specific.
What does “a lot of weight” mean exactly? It’s completely undefined — it would be impossible to know when (or if) you achieved your goal because it’s not specific. To add specificity to the goal, it would be better to say, “I want to lose 20 lbs.” When creating a SMART Goal, being specific almost always means stating your goal using “numbers.”
- It’s not measurable.
Being measurable is all about identifying two sets of numbers: the measurement of where you are now, and the goal (in numbers) of where you want to be when you achieve your goal. To add a measurable component to the example above, you might say, “I want to lose 10 lbs and go from 200 to 190 lbs.” And the measurement itself can just be your bathroom scale at home.
- It’s not attainable.
What is “a lot of weight” when you weigh 200 lbs? Is it 25, 30, or even 40 lbs? As many of us know all too well, losing weight is hard to do, and losing “a lot” of weight is even harder. While it would depend on the person’s individual circumstances, you could easily make the case that for most of us (with full-time jobs, families, and all of life’s responsibilities), losing 25-40 lbs in one go is just about impossible. A more realistic — and thus attainable — goal would be to lose 10 lbs. If you can do that, you can always set a new goal to lose 10 more.
- It’s not relevant.
Relevance is all about the why. What caused the person in the example to originally decide that they had to “lose a lot of weight?” What is it that they’re trying to accomplish, and why is losing weight important to them? Maybe this person is worried about type 2 diabetes, or perhaps they’re at greater risk for heart disease. Certain cancers have also been linked to being overweight or obese, as have a number of other health maladies. Adding the why to this goal could serve as an inspiration and a reminder of why losing weight is so important. So instead, the improved goal might be, “I want to lose 10 lbs, going from 200 to 190 lbs, to lower my risk of developing type 2 diabetes.”
- It’s not time-bound.
So many otherwise perfectly good goals end up missing the all-important element of time. A goal without a deadline (or a timeline) is just wishful thinking. Without the deadline, there’s no impetus to act, and there’s no framework within which to build a plan. According to the Mayo Clinic, “it’s smart to aim for losing 1-2 lbs a week.” If we split the difference and aim for 1.5 lbs per week, it would take almost 7 weeks to achieve our 10 lb. goal. In the interest of attainability, let’s call it 8 weeks. Therefore, our new and improved, SMART goal now reads something like this: “Over the next 8 weeks, I want to lose 10 lbs, going from 200 to 190 lbs, to lower my risk of developing type 2 diabetes.”
Setting the Marketing Strategy
Let’s continue with the same example from above. How does one go about losing 10 lbs over 8 weeks? Well, you’re almost certainly going to have to change your diet, eating healthier foods while also consuming fewer calories. A potential strategy here might be to work with a nutritionist or a meal provider service to get your diet on track. You’re also going to need to exercise. A strategy here could be joining a gym, signing up for workout classes, hiring a personal trainer, or just building your own exercise routine. There often isn’t just one strategy to achieve a SMART goal; it usually takes a mix of complementary strategies and tactics to get you to where you want to be.
Determining the Budget
Your budget is going to determine which strategies you can utilize to achieve your goals. If money is no object for you, then why not utilize as many resources as you can to help you lose weight? Why not work with a nutritionist to help you create a custom-tailored diet? And if you don’t like to shop and cook, why not hire someone to prepare the food for you as specified by your nutritionist? With all of that money, you’d probably want to join a gym and hire a personal trainer. It must be nice, huh?
At the opposite end of the spectrum with no budget, you can still achieve the goal of losing 10 lbs in 8 weeks, but you’re just going to have to do a lot more of the work yourself. You won’t have a nutritionist, so you’ll have to research diets and meals catered to weight loss on the internet. You’ll also have to do your own shopping and your own cooking (don’t forget to do the dishes too!). You won’t be able to join the gym and a personal trainer is certainly out of the question, so you’ll need to not only come up with an exercise plan yourself, but you will also have to be able to self-direct your workouts.
Wow — losing this weight just got a whole lot harder without the budget, huh? It might be worth trying to find the money if you’re serious about achieving this goal!
Execute, Evaluate, Adjust, and Repeat
Here’s what we mean by the four words in this last step:
Start the plan. You decided on the strategy (better diet and more exercise) and then you determined how much money you had available to carry out the strategy. In keeping with this example, let’s assume that you have enough money to work with a nutritionist, and to join a gym, but that’s it. Engage the nutritionist, get the meal plan, and start eating healthier. Join the gym, pick some classes, and start becoming more active.
This is a lot harder than it sounds. The trick is to figure out when to evaluate. If you hop on the scale on your second day and see that you’ve actually gained a pound, does that mean that you have to trash the entire plan and start over? Certainly not. But it might make sense to see where you are at the end of the second week. At that point, you’ll be one-quarter of the way through your plan. That doesn’t necessarily mean that you will have lost exactly 25% of your 10 lb goal, but that is probably enough time to gauge whether the improved diet and increased exercise is working, or needs to be tweaked.
Let’s say the nutritionist is great but you just don’t have time to shop and prepare your meals. Then it might be time for you to somehow find the money (probably by cutting back on expenses related to some other aspect of your life) to hire the chef or at least subscribe to a meal service. Likewise, if you’re not benefitting from the gym, you might need some help with a personal trainer (or maybe sign up for different classes or just go to the gym more often). While an evaluation might call for you to make changes to your overall plan, this doesn’t always impact the budget. For example, the gym membership is the same price for the month no matter how many times you go. If you decide that you need more exercise in order to lose weight, you can go to the gym 2x-3x as often without having to spend any additional money.
These four activities in this final step are meant to happen in a continuous cycle for the duration of the plan. A new strategy will almost always need to be adjusted, and an ongoing strategy will often benefit from opportunistic tweaks and data-driven adjustments. Keeping this feedback loop open will help you get to improve and will only make it more likely that you will achieve your SMART Goal.
Real World Marketing Budgeting
We talk to SMB owners and executives just like you about their marketing every single day, and we understand just how challenging the budgeting process is. We know that resources are finite, and the budget required to get something done typically includes more than just money. It takes people, new processes, and maybe new technology, too. Creating a new marketing plan for your business, or expanding an existing one, can be a daunting challenge regardless of whether you intend to hire a marketing agency to help. If you want to start a conversation about how we can help your SMB improve its marketing ROI, please give us a shout.