Budgeting for Business
How do you set a marketing budget?
Most organizations, it seems, use what the textbooks call the “arbitrary and affordable” model. With this model, the marketing budget is set after all salaries and fixed costs and a reasonable profit allowance are factored in. In other words, the marketing budget is pretty much whatever is left over.
Not very strategic, is it?
Let’s consider some of the other budgeting models. One of the most popular is based on a percentage of sales, often as determined by an industry average. Do you know what the average is for your industry? It does make for interesting reading. Unfortunately, most of the published numbers we’ve seen record only advertising as a percentage of sales, not broader figures for marketing. But since advertising is often a significant part of the marketing communications budget, you might enjoy seeing some examples. The variances can be quite dramatic.
|Industry||Advertising as percentage of sales|
|Eating place (Restaurants)||2.8%|
|Cookies & crackers||0.6%|
|Watches & clocks||10.7%|
You get the idea.
The automotive industry, by the way, uses a variation on this concept by allocating a certain number of dollars per new or used car for advertising.
Since conformity is so prevalent in marketing, it’s probably reassuring to see that one is spending at levels consistent with the competition. The problem is that this model assumes that everyone has the same goals, the same market condition, the same overhead and cost structure and the same needs as their competitor. That’s not very likely. Or very healthy. If my company is one-fifth the size of yours and I spend at the same percentage that you do, what are my chances of increasing market share? How about slim to none?
The other flaw with this model is that a sales downturn effectively reduces the marketing budget when, quite likely, it should be increased.
There are, of course, other models for establishing a marketing budget. Some involve complex mathematical modeling. The model that actually makes the most sense is also the one not very often used. It’s called “objective and task” budgeting. In this system, one establishes the company’s objectives and the strategies and tactics needed to accomplish these objectives. Once they are identified, the specific projects are estimated and these become the basis for the marketing budget. It’s simple. Logical. And, like we said, seldom used.
Some people might read these opinions and, since they come from a marketing agency executive, consider them self-serving. I suppose there’s some merit to this viewpoint. However, the size of the marketing budget is immaterial. It’s all about being strategic in the financial planning process. If you can do that and achieve more marketing impact with less dollars, more power to you.
As stated earlier, advertising to sales ratios are interesting, if not a particularly prudent way to budget. If you would like to see more examples of primary industry averages, we would be happy to share that information with you.
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