Use these 5 marketing budget models and optimize your marketing spend.
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One of the most difficult marketing decisions facing companies is how much to spend on their marketing budget. I will explain how to use 5 marketing budget models for small businesses.
Thus it is not surprising that industries and companies vary and how much they spend on their marketing plan’s budget. Marketing expenditures might amount to 20% to 30% of sales in a CPG industry it only 10 to 15% for a SaaS software company.
Within a given industry, low and high spending companies can be found. Apple is a high ad spender compared to lower marketing spending in the construction industry like Bechtel.
Marketing budgets now comprise 11 percent of total company budgets on average (Figure 1), according to the CMO Survey.
Consumer packaged goods companies allocate by far the largest percentage of total company budget to marketing, followed by consumer services, tech software/biotech, communications/media, and mining/construction. Companies that spend the smallest portion of their budgets on marketing include transportation, manufacturing, and energy.
What’s in the Marketing Budget?
Allocations within the marketing budget vary from company to company. For example, less than half (47.9 percent) of companies include expenses for marketing employees in their marketing budgets.
Other companies may put marketing employee expenses into general and administrative expenses, sales, or other areas.
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Most companies (61.3 percent) include direct expenses for marketing—such as advertising, trade promotions, and direct marketing—in their marketing budgets, but this varies by industry (Figure 2).
Marketing Plan and Budget.
The selection of a marketing strategy and organizational design moves the planning process to the preparation of the actual plan and its supporting sales forecast and budget.
Preparing the plan involves several activities and considerations, including selecting the planning cycle and frequency, deciding the nature and scope of the annual plan, choosing the format for the plan, and forecasting revenues and estimating expenses.
The marketing plan includes a situational analysis summary, target market description and strategic evaluation, overall objectives and specific objectives for each market target.
The optimum marketing budget is one in which marginal or incremental increases in sales are just equal to the marginal expenditures on the mix of marketing components.
This concept is difficult to apply because factors other than promotions also influence sales. Isolating the effects of marketing mix presents for a complex analysis situation.
Therefore, more operational budgeting techniques are used. Budget determination methods used in practice include:
How do companies decide on their marketing budget models?
I’ll explain the five common methods used to set a marketing budget below.
1. Affordable Method:
Many companies set their marketing budget at what they think the company can afford. One marketing leader explains why this method is simple.
First, I go upstairs to the CFO’s office and ask how much he can afford to give me this year. The CFO says a million-and-a-half dollars. Later the CEO comes to me and asks how much should we spend, and I say about a million-and-a-half dollars.
This method of setting marketing budgets ignores the role of marketing as an investment and the immediate impact of marketing on sales volume. It leads to uncertain annual marketing budgets which make long-range market planning difficult.
Many small companies run ad-hoc marketing programs that spends more or less the same amount on proven marketing activities such as pay-per-click ads, social media, content marketing, email marketing campaigns, and other marketing efforts.
They will spend more on marketing in one year over another depending on whether the business owner believes he or she is having a good year.
In effect, these companies treat their entire marketing effort as one big target of opportunity, following the way we’ve always done it this way school of hit-or-miss marketing planning.
2. Percentage of Sales:
This method calculates the budget as a percentage of sales and is therefore arbitrary. They often base the percentage figure on past expenditure patterns.
The fundamental problem with this method is that it fails to consider the relationship between marketing efforts and results. It can lead to how much spending on marketing when sales are high into little when sales are low.
The percentage of sales method offers the best approach to establishing a stake in the ground for your company’s total marketing budget. Once a total marketing budget amount is established, the amount to be spent on each of the individual components of the company’s marketing mix.
For example advertising, email marketing, trade shows, content marketing are determined, depending on your type of company, its previous marketing track record, and the success or failure of those prior marketing efforts.
In addition to using the percentage of sales method for establishing your overall budget, many marketing managers also hold back up to 10% of this amount as a reserve to handle unexpected marketing events and various new, unforeseen targets of opportunity in their marketing plans.
3. Competitive Parity Method:
This budgeting method is based on competitor’s actions. Marketing expenditures are guided by how much competitors spend. A major shortcoming of this method is that differences in marketing strategies between firms may require different marketing strategies.
For example, Revlon uses an intensive distribution strategy, while Estee Lauder targets buyers by distributing through select department stores.
Comparing the marketing strategies of these two firms is not very meaningful since their marketing targets and positioning strategies are different. This can be said for any industry.
Many midsize businesses carefully observe their competitors marketing programs, and combine this intelligence with whatever industry-standard data is available from trade associations or accounting sources, to arrive at industry standard amount of their own companies marketing budget, usually expressed as a percentage of total annual sales.
This ratio may be higher or lower in one industry compared to another, depending on the industry, and its maturity.
Some companies set their marketing budgets to achieve share voice parity with their competitors. This thinking is illustrated by the executives who have a trade source, do you have any figures which other companies in the building industry field have used which would indicate what proportion of gross sales should be given to our advertising?
This marketing executive believes that by spending the same percentage of her sales on advertising as her competitors, she will maintain her market share.
Two arguments advance the theory of this method. One is that the competitor’s expenditures represent the collective wisdom of the industry. The other is that maintaining a competitive parity helps prevent price wars.
However, neither argument is valid. There are no grounds for believing that competition knows better what should be spent on your marketing budget.
Company reputations, resources, opportunities, and objectives differ so much that their marketing budgets are hardly a guide. There’s no evidence that budgets based on competitive parity discourage price wars from breaking out.
4. Objective and Task Method:
The objective and task method call up marketers to develop their marketing budgets by defining their specific objectives, determining the tasks that must be performed to achieve these objectives, and estimating the cost of performing these tasks the sum of these costs is the proposed marketing budget.
This logical and cost-effective method is the most used marketing budgeting approach. Management sets communication objectives to determine the tasks necessary to achieve the objectives and adds up the cost.
This method also establishes the mix of marketing components by selecting the components appropriate for attaining these objectives. Marketing management must carefully evaluate how the marketing objectives are to be achieved and choose the most cost-effective components.
The effectiveness of the objectives and task method depends on the judgment and experience of the chief marketing executive and staff.
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5. Marketing Budgeting Models:
This method sets the budget using a mathematical model, often developed from historical data. The basic concern in using a model for budget determination is establishing its validity and stability over time.
A budgeting model is a multiple regression type model that uses several predictor variables, including the number of users, customer concentration, fractions of sales made to order, attitude differences, the proportion of direct sales, life cycle stages, product plans, and product complexity.
This model is similar to the profit impact of marketing strategy (PIMS) model. Although this model concentrates on the marketing budget and its components, rather than offering complete strategies for business units and products.
Start your budgeting process early so you can build a realistic budget. Your marketing strategies should be based on available resources. If your expectations exceed your internal capabilities and capacity, then this also is the ideal time to evaluate outsourcing options.
Marketing budgets are commonly created by any of these 5 models. You should carefully choose the one that best fits your current situation.
When planning your marketing budget, you must take into consideration all the influencing factors include historical sales, sales forecast, business life cycle stage, competition, growth goals, industry, market share, marketing technology infrastructure needs, the strength of marketing foundation, and reach.
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