Whether you’re starting a new business or running an established organization, one of the major dilemmas you need to address is determining the appropriate budget for marketing. After all, you don’t want to invest heavily in developing a hip, niche product, only to end up with a fantastic product in your hands without the go-to market plan and promotional means to drive awareness and sales.
In the mid-90s, Steve Jobs took Apple Inc. (which was on the brink of extinction) and turned it into one of the most valuable brands in the world. Jobs understood that a strong brand and marketing strategy is a powerful asset and a vital role in the success of any business. Today, Apple is one of many successful companies that spends more on marketing and sales than they do on research and development.
However, unlike Apple and other global corporations, many small businesses struggle to balance between spending on marketing versus other functional needs due to limited resources and capacity. This is why it is important to take time to evaluate your marketing objectives and to prioritize specific marketing initiatives to maximize your returns. Below, we will break down the marketing budget and discuss where to allocate your resources to optimize your marketing plan.
Before You Start
Refer to your marketing plan, if available. There are a few questions that you need to answer before you begin to set your marketing budget:
There are 6 common approaches to setting a marketing budget:
1. The random allocation approach—Possibly the most common method. Businesses that use this method follow no marketing strategy or plan. Budget is allocated based on impromptu efforts: “We need more sales; let’s have a campaign!”.
2. Keeping up with the Jones approach—Matching what the competitors are spending or reacting to a competitor’s increase in marketing efforts. Keep in mind that it is very difficult to establish what competitors are spending or how efficiently their budgets are being used.
3. The last year’s budget approach—Many organized businesses look at previous budgets and make upward or downward adjustments based on their evaluations.
4. The percentage of turnover approach—Organizations that use this method strive to establish an accepted marketing spend based on percentage of turnover (sum of money that the organization has collected from its normal business practices such as sale of goods and services). The generally accepted spend for a business in a steady state is 5%-8% of turnover and higher for new businesses or if there is a need to open a new market.
Note: If there are major changes in strategy, do not base your budget on previous budgets as those are likely to be irrelevant.
5. The task orientated approach—This method involves looking at your strategy and tallying up the costs of all planned marketing activities to arrive at the marketing budget. This may create a figure that you are not comfortable with, but it is the most strategic method.
6. The hybrid approach—Many businesses will incorporate several of these methods to come up with a realistic and flexible marketing budget that matches strategy with affordability.
Two Other Considerations
Aside from selecting the appropriate budgeting approach, you also need to think about what you’re really investing in. Remember that advertisements, trade shows, social media, mobile apps, etc. are only tools to help you gain and retain customers. Thus, your first consideration should be “how much is a customer worth?”
The most straightforward way to calculate customer lifetime value (CLV) is to subtract the revenue you earn from a customer by the money spent on acquiring and serving that customer, where the total revenue you can expect to get from each customer is your average order value divided by one minus the repeat purchase rate.
Let's say that the value of an average ticket at your establishment is $35 and anytime someone makes an order there is a 15% chance of the customer coming back and making a repeat purchase. Let's also assume that it costs you $10 to acquire each new customer. (Figures are purely assumptions for demonstration purposes.)
Thus, CLV = [$35 / (1 - 0.15)] - $10 = $31.17
The second consideration is “what is the average conversion rate from inquiry to customer?”
Conversion rates (CR) are calculated by dividing the number of conversions by the number of total impressions, then multiply by 100.
Your site had 2,000 visitors last month and produced 125 sales. (Figures are purely assumptions for demonstration purposes.)
Thus, CR = 125/2,000 x 100 = 6.25%
Knowing your CLV and CR helps to set the upper limit of your marketing budget. Obviously, your budget should stay below your total expected CLV, but if your conversion rates are high, you can allocate more resources on the driving channel. The point is that a marketing budget should not be perceived as an expense towards a single, immediate sale; rather, it is an investment in acquiring and keeping a customer for the long-term.
By this point, you’re probably still wondering how much other organizations are spending on marketing to gain a point of reference. The answer is: It varies by industry.
Below are some figures gathered in a 2017 CMO survey published by the American Marketing Association.
Percent of revenue by industry:
The SBA recommends that small businesses with revenues less than $5 million should allocate 7-8 percent of their revenues to marketing. This budget should be split between brand development costs (promotion channels such as website, blogs, sales collateral, etc.) and the costs of promoting the business (campaigns, advertisements, events, etc.). This percentage assumes that your profit margin falls within the range of 10-12 percent.
Where to Spend
Using the SBA recommendation as a reference point, you may want to consider setting a 5% of revenue marketing budget for your regular marketing activities, with added spending on periods that require extra marketing efforts to meet changes in strategy or to upgrade/enhance your marketing foundation.
In general, your marketing foundation should include:
Essentially, your marketing foundations consist of establishing your brand, defining your missions and values, and building your basic communication platforms. Efforts toward building and maintaining your marketing foundations fall under brand development. You may also use budgeting approaches 3, 4, or 5 to determine the appropriate amount for your marketing foundations.
Depending on your industry, you may need to invest more in promotional campaigns during certain seasons or years to capitalized on additional traffic. You may also choose to run a couple of spontaneous campaigns to temporarily boost your sales. This is where you can tap into the remaining 2-3 percent of your marketing budget, or implement budgeting approach 1 or 2 to meet your marketing needs.
Separating your marketing budget into brand development and promotional campaigns helps to maintain a degree of flexibility and bridge strategy with affordability.
Finally, you need to determine whether you should use an in-house marketing team or outsource your marketing projects to an external agency.
In-House Marketing Team vs External Agency
While having a team of marketers in-house allows for greater control and access to marketing personnel, finding talented marketers takes significant upfront time and monetary investment, not to mention the ongoing costs or salaries, training, benefits, and technology infrastructure upkeep. Additionally, internal marketers are expected to stay on top of industry trends which may be challenging when they’re also fulfilling other responsibilities as full-time employees.
External agencies not only provide expertise on the subject matter, they also focus on all aspects of cutting-edge marketing practices and trends. Therefore, instead of getting sidetracked by your organization’s corporate culture, an external marketing team serves to enhance to your marketing visions and maximize your marketing capacities. Finally, agencies may be hired on a per-project basis, which makes them more affordable than a year-round, in-house marketing team.
Many types of marketing agencies exist in the marketplace, each with different sets of competencies, culture, and practices. Make sure you thoroughly interview each firm to discover the best fit for your needs and budget.
Setting your marketing budget may be a daunting task, but it is a necessary step to achieving marketing and business strategy synergy. Remember to reference your marketing plan before, during and after setting you budget, choose the appropriate budgeting approach, separate your budget for brand development and promotional campaigns, and consider outsourcing your shortcomings to the experts. Talk to a marketing specialist today to find out how you can increase the return on investment (ROI) of your marketing efforts. Most importantly, treat your marketing budget as an investment towards gaining and keeping long-term customers.
Differentiate Your Business by Marketing to Women With These Tips
Even though the majority of household financial decisions are made by women, marketing campaigns tend to target men. By focusing advertising efforts on women, brands have an opportunity to create connections with an underutilized market.
According to a Forbes article, companies need to focus on ways to appeal to both genders, not just males. Women look for deeper connections, such as exceptional customer service and excellent quality of products. This means businesses need to highlight these strengths in their messaging. Customer service especially, remains a key element of sales.
Forbes states that storytelling is the most critical component for the success of nearly every brand. This method gives marketers the opportunity to differentiate themselves over competitors and create an emotional connection with buyers. This is especially important to e-commerce since most consumers do their shopping research and purchasing online.
By focusing marketing efforts on these key elements, brands can increase their appeal to women. This vital demographic could be key to increasing brand loyalty and sales.
Instagram Made Easy!
Tips to simplify and optimize your Instagram business profile
1. Don't forget the #hashtag
Even if you do, just go back and edit your post to add the hashtag in. As marketers, we all know it's all about the keywords.
2. It's all about timing
Between the hours of 9pm-8am are Instagram's most popular hours, therefore it would be most effective for your business to post during those times.
3. Share your Instagram photos on other social media platforms
Trust! We all know you are the World's Greatest Photographer. So when you post that amazing photo on Instagram, make sure to select to share it to Facebook and Twitter.
TIP: If you decide that you want to share a previous Instagram photo you posted, just click the "..." (3 dots) at the bottom of your image and click "Share". (Yes, it is that simple!)
4. There is such thing as bad publicity
If your business is tagged in a less than flattering photo, untag yourself! Social media is a way to present yourself and what your brand stands for. Don't build a bad reputation for yourself.
5. Utilize Instagram for the #filter
If you love an image but don't want to post it on Instagram, you can still utilize Instagrams filters. Here is the old trick of the wise: Set your phone on airplane mode and do your thing. When it comes time to post, it will save to your camera roll instead of posting on Instagram!
6. One filter to rule them all...
When in doubt, use the Mayfair filter. Users are more likely to interact and engage when you post an image with the Mayfair filter.
TIP: For the most engagement, stick with #nofilter.
If a user or comment is inappropriate, feel free to delete it! All you have to do is swipe left and you're set.
8. It's all about the #hashtag
Keywords are important in any context of marketing, hashtags are just another form of it! Make sure you are using the most popular hashtags to gain visibility and engagement.
Get to gram-ing!
Have you procrastinated on optimizing your digital campaign before the holiday season? Finish out 2016 with a strong holiday SEO strategy. Here is how:
What is the vital to focus on is quick-win areas. This means emphasizing on campaigns that will yield results quickly. Let's be realistic, you are not going to be the top search result over night. Rank your keywords towards local terms and long-tail phrases. Step 1 is to optimize titles! Titles impact search rankings directly, and descriptions do not. Make sure to take the time to optimize titles in order to decrease click through rates and appeal to the searcher in which will draw them to the page. The landing page is key for the searcher in order to convert. Review your current rankings. Focus on phrases that rank low on the first page or high on the second; these will be the terms that will be easiest to get clicks to conversions. It is important not to just list of keywords, which is considered to be keyword stuffing and is not recommended to do. Rather then going for the biggest phrases and failing, you should focus on the keywords that are less competition and will be easier to win over. You can bid on bigger terms in 2017, but for now, try and fry the small fish. After quick optimizing is all said and done, you can consider paid advertising. This can give you the quick boost your business needs before the holidays!
Qinghua Lao & ERC team