Many business owners use a percentage of sales as a jumping off point for determining how much to budget for marketing expenses.
Companies spend different percentages of sales revenues on marketing and advertising based on the industry, business model and profit margins. For example, if an automaker spends between 2.5 and 3.5 percent of sales on advertising, a liquor store might spend 5.5 to 7.5 percent. Even if your company doesn't have the multi-billion dollar advertising expenses of a Proctor & Gamble or AT&T, you can use the same tools to determine your company's most effective marketing budget.
Determine Percentage
The percentage of sales your company allocates toward marketing expenses can range from less than 1 percent all the way up to 30 percent, depending on a number of factors: your business model (b2b or b2c), whether your company is just starting out or has a well-established sales history, and your gross profit margins. However, the typical percentage falls within the 2 to 10 percent range for most companies. A newer company might fall on the higher end of that range, while an established company may not require as high a percentage to maintain branding and market share.
Calculate Then Evaluate
Once a percentage has been established, your budget can be calculated and should then be evaluated based on the aforementioned factors. For example, if your company is new and has projected sales revenues of $500,000, and you decide to spend 5 percent of that revenue on marketing expenses, that would give your company a marketing budget of $25,000. Company managers can then evaluate that number based on how confident they are about sales projections and how this number will affect net profit.
Determine Marketing Expenses
Examine what your company considers marketing expenses. For example, if your company plans to hire a dedicated employee for marketing and advertising duties, decide whether your company will consider that individual's salary a marketing expense or part of payroll. A rough idea of your company's envisioned marketing strategy will help determine whether the number you have arrived at based on your percentage is in line with your company's marketing goals.
Avoid Competitor-Comparison Trap
Many companies find it tempting to go by the same percentage or dollar amount as a competitor. It can be instructive to know what competitors are spending, particularly a friendly competitor or one outside of a territory your company typically serves. This can help prevent spending wars inside your company's market. However, making a budgetary decision based on what your competitor does assumes that your competitor fully understands marketing and advertising. It can also limit how much of an edge you can gain over a competitor if you are both spending the same sales percentage on similar marketing strategies.
