You’ve heard it before: You need to spend money to make money. Correct. But do you really know how much money you’re spending on all your marketing activity right now?
You should.
Marketing is an investment in your business, your team and your goals; without it, you’re not going to be able to reach your goals and steer your organisation in the direction you’d like to go. It’s absolutely crucial that you have an estimated marketing budget so that you can pace this alongside your goals and understand how much you can realistically afford to grow, because it all takes time.
We spoke to a digital marketing agency in Hampshire that recommended the standard marketing budget rule of thumb should be 10% of the previous year’s revenue. We’re going to break this down further and help you get a more specific.
To some, that may sound like overkill, whilst to others it’ll be quite conservative. That’s because average marketing costs will vary drastically depending on the industry you operate in, your position in the market and what you’re looking to achieve.
Let’s look at it closer.
The 10% Rule
The important thing to remember here is that this is a rule of thumb and a generalisation – responsible companies should be breaking this down further.
The 10% rule allows you to scale your marketing costs as the business grows, rather than a static number. This figure should allow for all marketing costs, from billboards to social media ad spend, but also for the one-off big costs such as website development or a rebranding campaign.
The 10% rule is recommended because it should grow with you. For example, if you turnover £1 million in 2020, your marketing budget is £100k for 2021. But in 2021, you should see return on investment from that marketing budget, so you turnover £2 million in 2021. As a result, your marketing budget follows suit and is set at £200k for 2022.
Let’s Break That Down More – Steps To Determine Your Marketing Budget
Define your goals – The first thing businesses must do when working out their marketing budget is decide what they’re looking to achieve in the upcoming year. Launching new products or services, expanding into new locations or growing your market share are likely going to require larger marketing budgets than maintaining sales numbers.
Specifying these goals in as much detail as possible will help organise where the money is going to be spent.
What your customers actually cost you – Dig into the existing financials. Calculate how much it costs to acquire a client or customer. How much are your cost per clicks and what are your cost per actions? What is your conversion rate?
The other metric that often gets overlooked is the lifetime value of your customers or clients. To work this out, you’ll have to have a good understanding of your sales cycle. Do customers buy repeatedly from you or return to your business again and again for your services?
Remember, it’s five times more expensive to attract and land a new customer or client than it is to retain an existing one. Research shows that increasing your customer retention can increase profits by more than 25%.
Projections – Now that you have all the figures in place you can calculate how many sales or leads you need to achieve your goals.
From here, you can work out how much you’re going to need to spend to achieve your goals.
Following this process will help you to clearly identify not only your marketing budget, but the most lucrative channels and areas for improvement. For example, if your conversion rate is low, your marketing budget could include user experience improvements across your website.
Should You Stick To Your Budget Even In Hard Times?
For over a decade, marketing budgets increased consistently year on year, with only a few notable jumps. For example, after the 2008 financial crash, there was a drastic increase in marketing budgets as companies attempted to recover their performance.
CMO conducted a survey in mid-2020 in an attempt to predict marketing budgets following the COVID-19 pandemic. It was anticipated that companies would have slashed their marketing budgets in order to survive.
However, the average marketing budget across all industries has actually risen from 8.6% to 11.4%, despite revenues falling in so many sectors.
So, why didn’t these companies stick to their marketing budget? And more interestingly, why did they increase it?
Because you need to spend money to make money.
Your marketing budget allows you to pivot your business. This was so crucial throughout 2020 and now into 2021, as so many businesses had to alter their offering and go online. Marketing budgets should obviously be used strategically, but it is an estimate, if it needs to be increased because of extenuating circumstances, then the best thing you can do is repeat the process above. Evaluate where the money is going to be spent best, what are your new goals and needs and go from there
