What is the right marketing budget?
This is a loaded question and can depend on the type of business you are, i.e. do you get co-op dollars, your status (start-up, growing, established, etc.) and the industry you’re in (factoring in the amount of competition vying for the same customers you are). While some new businesses adopt a strict “no marketing/advertising” policy, relying on word-of-mouth and organic, grassroots buzz via social media channels (non-paid) and the occasional PR story, most, at some point, have to acquire customers the hard way. With cold hard cash.
It would obviously be great to not have to spend any money to attract customers, allowing you to put any earnings back into other areas of your business, or to payoff debt. There are some new businesses that are unique enough to make this work. Or they’re small enough where sustainability is achieved without the need for larger volumes. However, whether due to their growth strategy or needing to grow (economy of scale), or an influx of competition, there’s a point when a business is forced to allocate a percentage of their budget towards marketing and advertising, beyond the quintessential stuff, i.e. signage for a brick and mortar location, basic web site, etc.
So how much is enough? We’d probably suggest at least 15% of your annual operating budget be used to market and promote your business. However, realistically, you’re probably going to want to at least double that to 30%, even going upwards of 50%. There are two basic reasons for this:
For one, per our blog post Trial and Error Marketing, you will not know the optimal formula for acquiring customers immediately. Your strategy will likely end up being a shot in the dark to see what works. Entire campaigns will need to be added, dropped, and revised. This can be expensive but the only way to see what vehicles are the most effective is to spend money. If you are consistent over time you will get a better sense of what works and the amount of return you can expect from your marketing investment(s). If spending more on Facebook Ads results in exponential conversions/sales you’ll want to keep “doubling down” on your ad spend until you see a dip. Conversely, if spending more on Twitter Ads over time doesn’t result in relative returns or a loss, then you’ve identified what’s worth the money (Facebook) moving forward and what’s wasted marketing (Twitter). And although you might never find the perfect mix you can start to identify certain trends, and what core marketing vehicles you can depend on to achieve the base level of success you need to keep your company on the right trajectory while slowly turning wasted marketing dollars (or what would have been dead money) into something else that’s a known quantity for improving your business, even in an area unrelated to marketing itself, i.e. operations, customer service, etc.
Two, if you’re entering a crowded space and/or one of high trend, you will need to catch-up or pace yourself with more established players who are spending at a higher level (and have the luxury to do so) to keep their presence top-of-mind. Even if you offer something better consumer behavior isn’t easy to turn. Customers are creatures of habit and hard to win over, especially if they’ve been loyal to a competing brand or have been used to doing something for X number of years, etc.
Worst case, you should probably have another 10% set aside for impulsive marketing opportunities (or to combat mistakes) that present themselves along the way. You might stumble on something extremely relevant that you never thought about before or, as you grow your network, potential partners might ask you (or vice versa) to come in on a co-marketing effort where you’ll want to be involved, as they could be more established and/or a more popular company. You’ll then be able to leverage this relationship by gaining exposure to their audience with a built-in endorsement from them, seeing as they thought enough of your products/services to partner up and introduce you (your company) to their fans.