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Marketing Budgets: How Much Should My Small Business Spend on Marketing?

Here are six baseline budgeting frameworks you can use to determine the best marketing budget allocation for your small business:

2. Testing/Modeling
Some small businesses may choose to determine their marketing budget through (informal) in-market or statistical modeling and testing. This approach calculates incremental volume and “pay out” of different scenarios to determine “optimal” spending.

3. Share of Spend (SO$)/Market
This budgeting approach aims to look at share-of-spending (SO$) in comparison to a company’s share-of-voice (SOV) in a category. You can draw conclusions about how your company is supporting its brands based on level of spending relative to SOM. The problem with this approach is that it relies on competitive forecasting. The reality is, most small businesses don’t have access to extensive business intelligence (BI) to support this approach.

4. Share of Spend vs. Key Competitor
Some businesses are simply determined to outspend their key competitor(s). While this method focuses primarily on your competitive market, it is not realistic for smaller brands who can get caught in a spending war vs. seeking a strategic position.

5. Ad to Sales
More commonly, small businesses set their marketing (advertising) budgets as a fixed percentage of brand sales. This is typically in line with category averages, historical spending or best practices. If you choose this approach, consider that this type of budgeting can accelerate the decline of brands in mature/declining categories. Also it is important to compare your small business to categories with similar cost structures. A business with higher market share, loyalty, or equity can succeed with lower ad:sales ratios than a smaller brand or startup.

6. What’s Affordable
It’s also not uncommon for small businesses to allocate “what’s left” after establishing profit objectives and spending in other high priority areas.  While you may be able to ensure money is not wasted consider the idea that this approach will not fully optimize your investment since higher advertising budgets would likely be justified by increased sales revenue. Small businesses that take this approach are likely to be under supported by making marketing their lowest priority.

The Best Approach to Develop a Marketing Budget

If you’re unsure where to begin zero-based (task-based) budgeting is the best place to start. This approach simply estimates the cost to achieve specific objectives. To get started:

1. First, determine your marketing or media objective (i.e. increase leads or frequency of purchase, build awareness, test direct response initiatives with email marketing, etc).

2. Then set your communication goals (when, where, how often, etc.) by clearly defining your business situation: what you’ve learned to-date, competitive activity and outside research and case studies (if applicable).

3. Lastly, estimate the cost of reaching your goals. Gather information from targeted vendors, media outlets or consultants to gauge prices.

Most importantly, test everything. Never take a given budget at face value, always ask where the budget came from and what else is being spent and be sensitive to your unique financial situation.

Whether you run an international established brand or a new startup, it can always seem like there’s never enough. Don’t be afraid to get creative and make your marketing dollars work harder.

Connect with Erica Nicole on Twitter.

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Photo: Massimo Dutti

 

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