The phrase “budget planning” definitely sees more interest at the beginning of each year. While you want to increase the flexibility of your budget, a long-term plan allows you to have a more consistent and effective marketing strategy.
You don’t need to convince anyone that creating a plan is necessary, but how should you go about doing it? Here are some best practices for allocating your marketing budget.
1. Calculate your total marketing budget
Do you know the total budget you have to promote your business? This could be a monthly, quarterly, or annual figure. If you don’t know, use this simple budget allocation model to calculate your budget based on the size of your business:
New businesses: Take 10-20% of your gross income and allocate it to marketing. Since you’re still new and constantly trying out different marketing tactics, most of the money will help you get your business off the ground.
Established businesses: Spend 5-12% of your gross revenue on marketing. Since you’re already established and have a customer base, you won’t have to work as hard to find new customers.
Of course, the marketing budget breakdown depends on what type of business you represent. The simplest possible split is recurring vs. one-time expenses. For example, payouts and subscriptions can be included in recurring costs. One-time expenses, however, could be fees for an event or the translation of an article.
Another breakdown could be online and offline expenses. However, this solution makes little sense if you run an online business. In this case, it’s obvious that the offline one is a clear minority of your marketing activities. You can then try to divide the budget into sections based on the type of marketing. Some examples are:
- Social media
- Content marketing
- Google Ads
- Online events
This is an overview of marketing budgets based on the industry in 2021:
Industry marketing budget by the percentage of the company's revenue:
- Technology 21%
- Service consulting 21%
- Healthcare 18%
- Wholesale retail sales 14%
- Production 13%
- Communication media 10%
- Packaged consumer goods 9%
- Banking, finance, insurance 8%
- Real estate 8%
- Consumer services 6%
- Transport 6%
- Education 3%
- Energy 1%
2. Specify what your goal is
Start with a clear goal for the year or another time period. This will make it easier to match the necessary activities and tools, and track your competition day by day.
When setting business goals, make sure they’re specific. You don't want to set a goal like "increasing sales." It will not give you a precise goal that you can pursue, measure, and achieve. Instead, set a goal like "increase sales by 20% by the end of the year."
When planning expenses and specific marketing campaigns, it’s worth returning to the stated goal to check whether they are consistent with it.
3. Analyze the previous year, week, or month
In order to successfully plan your actions, you need to know how you did last year, month, or week. Create a document with metrics: year to year, month to month, and even week to week.
How do you calculate the growth rate?
Here you will find a spreadsheet with examples and a prepared formula for calculating year-on-year. You can create other time frames in exactly the same way.
While last-click analysis provides valuable information at the entry-level, if you want to understand the deeper complexity of your activities you have to run a Marketing Mix Modeling analysis. It’ll let you understand what is the real attribution of each channel, what is the halo effect between channels, and what is the real potential for growth in each country and channel. What’s the halo effect? A good example is a story about flyers.
A restaurant owner decided to advertise her place and hired three people to hand out flyers. Each of them had a different colored coupon so she could later assess who had done the best job bringing people into the restaurant.
After a week, she determined that:
- more than 50% of the visitors had a green flyer.
- red and blue flyers only accounted for 10% of the traffic.
- red and blue flyers only accounted for 10% of the traffic.
Of course, she decided to fire the two employees handing out red and blue flyers. She asked the employee handing out green flyers to take care of full-time promotion. However, a month later, the results were not as she expected.
Traffic was the same as before, but revenue was actually down. How could that happen?
She decided to follow her employee surreptitiously. She discovered that instead of roaming the neighborhood, she was standing a few feet from the restaurant handing out flyers to people who were going to the restaurant anyway.
No wonder it was showing great results. Of course, it wasn’t really growing the business though. Planning the annual allocation of your budget begins with a general analysis of expenses and marketing activities from the previous period. All you need is a simple spreadsheet in which you will collect all, even the smallest, expenses incurred by marketing in the previous year and cost-free activities. In a short time, you’ll notice some links between them that will allow you to group costs according to categories and priorities. When assigning a hierarchy to activities, think about the financial dimension. Perhaps some expenses were disproportionate to the effect achieved.
4. Monitor your market share
General marketing can be calculated with a simple formula: take the company's sales for the period in question and divide it by the industry's total sales for the same period. You can find sales data for specific categories and industries on the websites of statistical organizations and offices, such as Statista.
This ratio gives an overview of the size of the company compared to the competition and the market. For example, if you have a bicycle shop and you have sold 20,000 bicycles in the course of a year, while in a given market in general 100,000 bicycles were sold, your market share is 20%.
However, it’s good to keep an eye on other market-related metrics as well. If you market in many countries, you should regularly look at a summary of the search volume for keywords related to your brand, and update your scoreboard on your market share. This is calculated based on your impressions and overall search volume.
5. Update potential channels
After conducting market research, determine which channels your users are using. After that, decide which marketing channels are best for your business.
By creating a breakdown of your marketing budget, you’re also, in a sense, determining your sales funnel. Your sales funnel is a crucial component of managing your marketing budget because it determines where you should spend your money. Understanding your company's sales funnel will help you identify where a digital marketing strategy is needed to prevent more customers from falling out of the funnel.
For example, let’s say you notice that many customers in your company's funnel are in the consideration phase but very few are reaching the decision phase. Even though some of the drop-outs are natural, you'll find that the drops are more significant than you might expect. As a result, you may need to spend more money on strategies that help you move prospects from the consideration stage to the decision stage.
By creating a funnel and adjusting channels and campaigns based on stage and need, you can identify which channels need more investment and which should perhaps be abandoned.
6. Create a scoreboard with key metrics
You're probably already measuring revenue, traffic, and conversion over time. However, adding additional metrics to your scoreboards can reduce guesswork in future iterations and simplify the allocation of your marketing budget. Our key metrics are:
- Market share trend
- Average order value
- Cost per click to customer lifetime value ratio
- Paid channels saturation and your position
- Multi-touch attribution
Scoring, meaning the meticulous assessment of effectiveness based on results, of individual activities and tools will allow you to approach planning methodically. It’s worth starting with setting overarching goals, both strategic and quantitative, and then focusing on individual marketing areas to establish a hierarchy of activities. The appropriate allocation of your budget should be adjusted to the goal defined by the measurements.
7. Prepare a strategy for your marketing campaigns
Before developing a plan for your marketing budget, you should consider what target audience you want to reach and, most importantly, prioritize. With that in mind, you can create more efficient campaigns that will help you avoid wasting resources. They’ll also take up less space in your budget.
Ask yourself about the needs of each audience. If the buyer you want to reach has little or no knowledge of your brand, they’ll likely require a larger investment in converting them. On the other hand, if the target is already loyal to your brand, you will direct a different type of content to it.
Profits from leads obtained through marketing activities allow you to assess the effectiveness of these activities and the return on investment in the channel. If the cost of the campaign is disproportionately high in relation to the returns, it’s worth considering whether this is a good way to spend your budget. In other words, give it up or look for ways to optimize it.
Your marketing budget will help you keep your eye on the ball throughout the year
Some of the above-mentioned points will help you not only create a breakdown of your marketing budget but also your marketing strategy. It’s important to define a clear and measurable goal and to match specific actions to it. This will allow you to see how the results compare year over year and adjust expenses depending on your needs during the next stages of the sales funnel.
Published December 16, 2021