Which of the following methods of setting an advertising budget is the most accurate?

Tim Matthews

Tim Matthews

Marketing Leader | Author 'The Professional Marketer' | Advisor

Published Oct 11, 2014

This post is excerpted from my book The Professional Marketer (Embarcadero Press) - T.M.

How big should my marketing budget be? How do I figure out my marketing budget? How do you get your CEO to give you the budget you need?

I get these questions all the time from my marketing peers. Here's how you do it. But first, a word about your job as a head of marketing.

Very little happens in marketing without money. Securing enough money to support an organization’s goals is a fundamental responsibility of a CMO or a VP of marketing. Most heads of marketing learn from experience how to get what they need.

Unfortunately many of them have to learn the hard way, through errors and inadequate budget allocations. The reality is that many marketing executives simply lack basic skills in building, presenting, and defending budgets. Remember that when an executive team makes budgeting decisions, it needs to consider whether investing in new research, more salespeople, or a new marketing initiative is the best way to spend money. An effective marketing head must be able to convince the team that this is the way to go. So, here's how you do it.

There are four primary methods for determining the marketing budget. Here they are, starting with the most widely used method, the percentage of revenue:

• Percentage of revenue – The marketing budget is derived as a percentage of the overall organization’s expected revenue for the fiscal year.
• Competitive comps – The marketing budget is derived by estimating the competition’s spend. This task is easier to perform for public companies, which must disclose how much money they spend on sales and marketing.
• Activity-based – This bottom-up approach begins with the organization’s revenue number and works backward. The budget is calculated based on how many leads are needed to hit the number. In addition to lead-acquisition costs, other expenses, such as customer retention, awareness, branding, and run-rate costs (see below), need to be factored in.
• What you can afford – The least favorite approach, this “hand-to-mouth” method is sometimes just a reality for smaller companies. Needless to say, it is always a good idea to show the CEO, president, owner, or founder the budgets derived from competitive comps and activity-based methods to influence their ideas of what they can afford.

Even if your company uses percentage of revenue for setting the marketing budget, creating a bottom-up, activity-based budget makes your funding requests easier to defend. For example, if your team is effective at generating MQLs that convert to SQLs, then the money you request for demand generation will be difficult to challenge. Going further, an activity-based budget will include certain “keeping the lights on” costs, or run-rate costs. This term refers to activities and programs the marketing team cannot do without, such as PR agency retainers, collateral production, and website maintenance. Any big-ticket items like advertising and event sponsorships must be closely tied to corporate awareness and demand generation goals.

So, how do you get your hands on the percentage of revenue that's right for your company? Fortunately, there are many sources that provide this information. Included here are industry research firms like the Corporate Executive Board, analyst firms like Forrester Research and IDC, and specialized marketing research firms like SiriusDecisions and MarketingSherpa. The range of spend on marketing has remained quite wide over the years, from as little as 1.5 percent of revenue to slightly more than 10 percent of revenue. Despite these disparities, however, an overview of marketing spend benchmarks reveals some fairly consistent patterns:

• Consumer products vs. B2B products – Not surprisingly, consumer product marketers spend more than B2B marketers. This pattern is due largely to factors like the cost of advertising and spending in support of the brand.
• Company size – Small businesses frequently spend proportionally more than larger businesses, because they do not enjoy the economies of scale, yet they need to provide many of the same marketing programs and services. As a VP of finance colleague of mine once explained, “We’re not fat, we’re short.” He meant that we were spending proportionally more on marketing because we had not reached the revenue heights of our competition.
• Industry – Some industries spend more than others on marketing. In B2B, for example, software companies spend more than mining companies. Similarly, beer and soda manufacturers spend more than most other consumer products. Marketing spend in the insurance and pharmaceutical industries notably increased starting in the late 1990s due to their increased use of advertising to reach consumers directly.
  
• Business growth stage – Companies in growth mode spend more than those in slow-growth or maintaining mode. This should not be a surprise. After all, acquiring new customers is the most expensive marketing task.

Regardless of where your company falls within these various patterns, it is essential that when you utilize industry benchmarks, you compare your company to the appropriate profile. Large companies with an established brand name and “cash cow” products that rely heavily on renewals rather than new sales will spend less on marketing. So, if you work at a start-up, don’t let your CFO use data from a large company to talk you down to a spend level that does not fit your business. The result won't be pretty.