When businesses start, marketing is a primary activity. Then you get busy, which of course is the whole point and marketing moves to the back burner.
You know you should be keeping on top of it. On the other hand, your business is in a pretty good place. So when the question of how much to budget for marketing comes up and you’re pressed for time (because you’re always pressed for time these days), the answer tends to be, “Let’s keep doing what we’re doing.” Or maybe you take what you spent last quarter and add X percent.
This works. For a while. But as you row farther from shore, your original reference point gets smaller and smaller on the horizon. Eventually it disappears altogether.
Let’s say you have a down period. Do you spend less because you made less? Or do you spend more because you want more business? Or do you hold the line? You can find justification for any of these. Take your pick.
But then maybe you have a really good quarter or year. Spend more? The same? Flip a coin.
Then your competition’s marketing budgets change. Are you aware of it? If you are, what do you do about it?
The point is, over time, a businessperson’s sense of what’s appropriate to spend on marketing can get progressively fuzzy.
A Tip to Hit the Marketing Sweet Spot
So are you spending too much, too little, or just what you should? One way to determine that is to review the advertising-to-sales ratio for businesses in your industry. Basically, this figure says, for your industry, X dollars in marketing correlates to Y dollars in gross revenue. Dividing X by Y gives a percentage you can use to determine your own marketing budget.
The exact percentage depends on your industry. If you’re in the computer and office equipment industry, the accepted figure’s currently around 0.6%. Wholesale hardware, about 3.1%. If you’re in office furniture, the figure goes down to 0.2%. These 2014 figures for more industries will give you an idea what may be a good ballpark for your business.
How would this work in practice? Let’s say you sell hardware at wholesale. Last period, gross revenues were $450,000. This period, you believe you’ll sell $500,000. Multiplying this figure by the percentage above (3.1%) gives you a $15,500 marketing budget.
A caveat: take the above formula with a grain of salt. Every business is different and as always, your mileage may vary. Activities such as launching new products and services may call for a larger percentage than average. A new business can require more marketing than an established one. On the other hand, factors such as local margin pressure could shave some from the figure. And keep in mind that the effectiveness of any given marketing channel (social media, direct mail, events, etc.) will vary by industry, geography and so on. However, despite all that, this formula can be a good way to recalibrate your marketing budget so it’s at least in line with industry norms. Where you go from there depends on your goals and other specifics. The general idea is to give your marketing budget a rational footing, instead of basing it solely on guesswork.
Looking for a way to conserve cash for marketing and other business growth activities? Learn more about how LEAF can help you equip your business without straining cash or existing credit lines by asking your Account Champion.