For the small business owner, it seems that setting a marketing budget is as clear as knowing for sure how the big bang started. Everyone just assumes that “bang” and then the expansion happened. Is it possible that small business owners assume that just getting started in business will be enough for their expansion?
Assumptions and word of mouth can only take a business so far. There has to be a way to attract and retain customers to your business and that way is called marketing. Think about the companies that are now iconic in America such as McDonald’s, Ford, Walmart, and the list goes on. Do they need to market since most everyone has heard of them and enjoyed their products?
The answer is a resounding “Yes” and you as a small business are no different. Consumers need to know that you are in business and have a product or service that can solve their problems or meet their needs.
What Percentage Of Your Business Budget
Depending on the age of your business and the known track records of your business there are some basic rules of thumbs that can be used to start with. None of these are a great mystery and can easily be found in most blogs and business articles on Marketing.
You will need a larger marketing budget if you are a newer company (less than 5 years) compared to a more established company that is older than 5 years. The reason is simply named recognition and repeat customers. The younger in business this means some fewer peopleknow about you.
So here is a starting point on what percentage of your gross revenue you should apportion to market.[i]
- For businesses just starting or less than 5 years old start at 12-20%
- For more established businesses that have a consistent stream of repeat customers 6-12%
This was adopted from a decent article at Wordstream Blog and cited below. If this is the first year in business, then the working capital you acquired (self-funding, investors, loans) should have earmarked as a good starting point of 20%. Once you completed your first year in business and assuming your company made money, the retained earnings forwarded to the second year to be used for marketing should be 12-20% of the gross revenue from the previous year.
Once you have a few years of business you have a track record of your business performance and this allows you to create Pro-forma budgets that will show the expected growth going forward with a decent amount of money going into marketing.
Do not skimp on this marketing budget because the very lifeline of your business is based on marketing to repeat customers and acquiring new customers. A more well-established business leader knows this point, and even if they lower their percentage of budget money to marketing they can still be spending a lot more on marketing than the newer lesser-known competitors who market at 20%. The reason is that 6% of a large number is bigger than 20% of a smaller number. Just math!
Types Of Marketing
So let’s consider the types of marketing that are available to any business. The reason you need to know the types of marketing available is that you do not want to invest good money toward a mediocre return.
You have to know what works for your business and what does not work for your business. That is not always easy to determine and we will discuss the finer points of this in the next section. For now, we will simply look at the main avenues of marketing to help your business grow year over year.
First of all, the two types of marketing can be employed. The first would be information only with no call to action. The second would be informed with a call to action. It appears that most marketing that throws out a wide net to as many consumers as possible is informative only. Marketing that is more targeted should have a call to action.
Here are a few of the marketing mediums:
- Word of Mouth (effective but not easily controlled by the business owner)
- TV Advertisements
- Radio Advertisements
- Text Messaging (Creates a Top of the Mind scenario to the customer)
- Email marketing ( Also creates a Top of the Mind)
- Blogging (written and video)
- Sites such as YouTube for video marketing
- Pay per click online
- And many more… such that one research paper found 163 different types of marketing[ii]
So which of the myriads of marketing will be the best for your business? There is no hard and fast rule and the simple answer is to use the one or several that work for your business. If one becomes ineffective then try a different one.
In addition to all the possibilities, here are a few guidelines. First, determine if your business products or solutions will benefit a wide range of different types of people or is it a more targeted niche? Marketing with great advertisements on TV or Radio will effectively inform a huge number of different types of people to your business. That is fine if you accept all types of customers.
However, what if your business had a much tighter focus or narrower niche? Would use TV or Radio be the most effective? Most likely not!
Niche marketing will be focused and use mediums such as email marketing, pay-per-click, text message marketing, blogging to name a few. You simply have to start fully knowing your business and the industry you are in.
Also, your website should be extremely robust and create a call to action to either purchase, request more information, or at least inspire the lookers to click to the different pages of your website. It should go as far as saying you are the leader in the industry because as far as you are concerned you provide the best value at the best price. Period!
KPI And Marketing
Key Performance Indicators (KPI) are necessary for any business, large or small to keep track of what they are doing right and what needs improvement or even eliminated. When it comes to marketing your business, you need to start tracking all the different types of marketing. Yes, that is correct; you need more than one type of marketing!
Just as spokes on a wheel keep the wheel in the round, you will need more than one marketing strategy to keep your business growing. So take a top-down approach to this.
The most important KPI is gross revenue growth year over year with the percentage of cost relative to inflation in check. What we mean is that there is a critical balance between creating more revenue without creating more costs. In other words, do I have to spend more to make more?
If you look at your marketing budget overall as an investment and not a cost, did this KPI of more gross revenue give you the projected return on investment (ROI) that you had set as your goal? So month over month, as a small business you need to see the growth versus cost ratio.
Now, drilling down, you need to take a look at every type of marketing you are doing and have a system in place how each type of marketing is performing. You need to know how you are going to measure each type of marketing.
For Radio or TV advertising, measuring the effectiveness of that would be in your regional name recognition as a business. Did that type of marketing drive inquiries to your business website, email or even phone number?
How are the different types of leads bringing more potential customers into your sales funnel? Once in the sales funnel, how are your marketing efforts bringing them from an inquirer to an actual customer? These are all KPI’s you need to know and understand.
This is where you will start to fully understand the actual cost of customer acquisition and retention. The entire purpose of knowing the marketing KPI’s is to make sure that your marketing efforts are not simply money wasted down an unprofitable tactical marketing strategy.
Do not become too attachedto any one type of marketing if it is not working. Find out what strategy is growing revenue and which ones are less effective.
Can A Marketing Budget Be Set That Matches Your Growth Goals?
So back to the original premise of this article about setting a marketing budget to match your goals! We gave you some generalizations on the percent of gross revenue at the outset of this article. However, are there any calculations that can make it more accurate?
The answer is “yes” but it will take some time to create a good set of business history based on income/expense reports and other standard accounting procedures. You can start with the percent of gross or projected sales and as you build your statistics, you can become more accurate.
Over time you will know the number of leads coming into your sales funnel from all sources. You will know the number of leads per month coming in from all marketing sources. You will know the leads to qualified leads as they filter down through your system and the cost to get to that point.
You will then start to comprehend the number of opportunities of qualified sales leads to convert into new customers and finally, you will understand the number of purchase acquisitions each new customer will make over the measuring period.
This will bring you to the average revenue per new client and average revenue for existing clients. So as we look at this formula it would look something like this.
- Number of leads coming into your sales funnel each month or year (NL)
- The number of leads converted to customers who purchased. (NC)
The ratio here would be NC / NL x 100 equals the percent of customer growth as a result of your marketing efforts. So to keep it simple if you could show you had 10,000 potential leads going into your sales funnel and this converted to 1000 new customers that would be a 10% conversion rate.
- 1000/10,000 x 100 = 10%
That is a high conversion rate, but you should understand the process here. You should track this for each type of marketing you did going into your sales funnel. This will start to give you a very clear picture of what is working in your marketing ventures and what is not working.
Now to get it even more detailed, you will look at the following:
- The total Marketing budget for the year (TM)
- Number of New Clients converted from the sales funnel (NC)
- The average amount of revenue per new Client. (AR)
So let’s assume that your marketing budget was $100,000. After all, was said and done you acquired the 1000 new customers as in our above example. Let us assume that each new customer brought in an average of $1000. So now you know the math.
- TM / (NC x AR) x 100 = Total return on investment.
- $100,000/ (1000 x $1000) x 100 = 10%.
This means that your sales increased by $900,000 with an investment of $100,000. This is very simple and maybe not accurate in the real business world that you live in. The formulas here are simple enough for you to start taking a more scientific approach to your marketing efforts.
You will start to know year over year exactly what is working in your marketing efforts and what is not working. You will start to know that for every dollar you invest in marketing will return a certain gross revenue amount.
This is just a short eye-opening article to get you as a small business owner to quit guessing and start putting real numbers, real solutions and real results into your business. This is so that after 5 years in business you do not become one of the failed business statistics.
This is so you can enjoy being in the business you set your dreams one and your family’s future!