Establishing Your Marketing Budget
Spending on marketing support--promotion, advertising and public relations--varies widely, from less than 1 percent of net sales for industrial business-to-business operations to 10 percent or more for companies marketing consumer-packaged goods.
Consumer packaged goods companies may spend 50 percent of net sales for introductory marketing programs in the first year, subsequently lowering the percentage spent to a stable 8 to 10 percent within a few years. Retail stores that advertise and promote spend an average of 4 to 6 percent of net sales for marketing support.
Often, small businesses estimate their sales revenue, cost-of-goods, overhead and salaries, and then gross profit. Anything left is considered available funds for marketing support. That's not such a good idea. A more rational approach for setting your marketing budget is to estimate what your direct competitors spend in marketing support and then try to at least match that amount.
If you are the new competitor in the marketplace, you will have to spend more aggressively to establish your market share objective. Here's a sample case study demonstrating how one small business set its marketing budget.
Joe's Redhots, a hot-dog cart selling to office workers, wanted to use popular media such as TV, radio and newspapers to advertise, along with promotional free product samples and coupons. Joe learned from his suppliers that his competitors in the downtown office area were spending little or no money to promote and advertise their cart luncheon businesses. He estimated that the most successful hot-dog cart spent 5 percent of net sales revenue for promotion and advertising. Joe decided to spend at least 10 percent of his net sales during the first year.
Joe ranked all his possibilities in order of probable effectiveness, with estimated costs:
- TV ($500/30-second ad/station)
- Radio ($50-$100/60-second ad/station)
- Newspaper ads ($500/ad)
- Cart signage ($100)
- Flyers ($100 @$0.10 each)
- Free samples ($25/day @$0.25 each)
- Coupons ($5/day @$.025 each)
- Frequent purchase book ($15/day)
- Soft drink premiums (supplied by drink companies.)
Joe found that any broadcast ad required additional production costs that were at least as much as the cost of a single ad. In addition, he needed to run at least four or five ads per station to be effective. Breakeven cost coverage would be exorbitant, with over a year's estimated sales needed just to pay for a small TV and radio campaign. And it's difficult to advertise with available media just to his target group of office workers within a radius of six city blocks.
Joe decided to have his cart painted ($100) with a clever message ("The best place to have a quick lunch"), hand out 1,000 flyers ($100) over three months to offices, do the soft drink premium program (collect can tabs for free gifts provided by local soft drink distributors), and try to get a free PR article mention in local newspapers and downtown TV and radio stations by sending free samples to editorial staff before lunch. He figured he could afford to hand out flyers and samples all year long and stay within his 10 percent budget limit.