How much should you spend on marketing?

How do you decide how much money to spend on marketing? And what happens to your marketing budget when you have to make cuts?

Let's talk about money for a moment. Some people talk about marketing as a cost, others talk about it as an "investment".  Those who see it as an investment are more likely to be strategic in its application, but whatever term you use, how do you work out what the level should be?

Setting a marketing budget begins with answering a few questions:

• What are the strategic goals for next year? How many of them can realistically be accomplished?
• How easy or difficult is the market?
• How strong is the competition and how aggressive are the competitors being?
• Is the emphasis on existing customers and markets or something new?
• What does the business think it can afford?

There are many methods of setting a budget.

Possibly the most popular is the random allocation approach, which is used by businesses in which marketing follows no strategy or plan.  Budget allocation normally follows a cry of "We need more sales; let's have a campaign." (Sound familiar?!)

Sometimes we see the keeping up with Joneses method; namely, matching what the competitors are spending, or more often reacting in a panic when a competitor is seen to be upping its profile (the marketing equivialent of the morning after pill).  Of course, it's very difficult to establish what competitors are spending or how efficiently budgets are being used. 

The starting point for more organised businesses is often to look at last year's budget and make an upward or downward adjustment based on the mood in the camp. This is otherwise known as the "We've had a bad year, cut the budgets" method (or if we're lucky vica versa).

Closely aligned to this is the percentage of turnover approach. The accepted average marketing spend for a business in a steady state situation is between 5%-8% of turnover. Of course, if it is a new business or there is a need to open up a new market, the figure can be many times higher.

Which highlights, the biggest flaw of both of these methods. While both are quick and simple to calculate, they take no account of current needs and strategy.  If major strategic changes are to be implemented, previous budgets are unlikely to be relevant.

Slightly more strategic is the task orientated method.  This involves looking at the strategy, tallying up the costs of all planned marketing activities and arriving at the budget.  Sadly, this often creates a figure that the management team struggles to be comfortable with.

Of course, many businesses will make use of several of these principles and use a hybrid approach to come up with a realistic marketing budget, which matches strategy with affordability.

What's missing?

In setting a marketing budget, many business owners and marketers are failing to think about what they are really investing in.  The investment isn't in advertising, trade shows or the internet - these are only the tools - it is in gaining and keeping customers. As Drayton Bird, the marketing guru and copywriter, once said: "We all need to remember that the currency of our businesses is customers - and act accordingly".

So the first budgeting question is, "how much is a customer worth?"

And the second budgeting question is "what is the average conversion rate from enquiry to customer?"

If you've been in business for a while, you should be able to work out how many enquiries you need to create a customer, how long customers stay with you, and how much profit they provide in that time. From there, it should be possible to determine what you can afford to spend to recruit that customer in the first place and then retain it.

Drayton tells the story of a client who sold fast moving consumer goods in the UK. The client asked: "If the gross margin on a sale is 80p, how can I afford to send out direct mail at £1 a time?"

Drayton asked him if he knew the average lifetime value of a customer - not just one sale.  The client worked out that the average customer bought 200 packs a year and stayed for about five years.  The conclusion is obvious.

The same principle applies if you are an accountant producing a lifetime of accounts for a client, or a finance broker that is likely to arrange many loans. You can afford a series of high impact communications to prospects if the lifetime value of a new customer justifies it.

The point being that marketing budgets should not be thought about in term of making an immediate sale, but making and keeping a customer.

But it all starts by thinking about return on investment, not expenditure in isolation, and taking the time and trouble to assess how many leads you need to create a customer and then what that customer is really worth.