One of the most important decisions a business owner or CEO will make is establishing a budget for marketing. Like talent, product and infrastructure, marketing must be viewed as a necessity in business. Marketing expenditures are essential investments for growth.
An average SMB (small-to-medium size business) will typically set a marketing budget at 4% to 6% of sales revenues. There are several factors that can impact this budget. As an example, a well-funded startup may invest 20% of revenues for aggressive consumer acquisition programs and advertising. Notice, the “well-funded” qualifier. Likewise, there is always difficulty in setting a budget for a pre-revenue company. Entrepreneurs will often spend most of their investments in product and then struggle to bring in sales. Startup costs must include marketing. For every dollar invested in product, people and infrastructure, an equal dollar should be set aside for investment in sales and marketing.
Here are three simplified phases for marketing investment planning:
1. Brand Awareness: Your marketing investment should start with focus in reach and awareness including brand identity, a website, company advertising and direct and social marketing.
2. Engagement: The second phase invests in additional marketing programs that support your sales efforts including lead generation, publicity, web marketing (SEO and SEM), market validation, events, advertising, presentations and customer case studies.
3. Nurture: Finally, maximize your marketing investments with customer communications, CRM services, loyalty initiatives and nurturing programs to maintain the valuable potential and existing customer relationships. Once you have them engaged, use your marketing spend wisely to develop and grow your relationship.
After your marketing budget is defined, you will want to establish how you will measure the success of your investment. ROMI is the acronym for Return on Marketing Investment. The calculation is total revenue divided by marketing spend. ROMI = Revenue ($) / Marketing Spend ($).
Some marketing activities such as branding, advertising, PR and social media are harder to track impact and influence. As a rule of thumb, the simple ROMI equation gives you a thumbnail sketch of your return on your marketing investment. ROMI is a good KPI (key performance indicator) for leaders to use in the business dashboard.
If you are a startup or pre-revenue, the marketing spend will be set as your budget for purposes of forecasting. Some may argue that there should be other factors added or subtracted, such as attributable revenues; however, most businesses have a difficult time tracking every dollar spent on activities such as advertising. Start with the broadest “buckets” and as you increase your marketing reporting and tracking sophistication, you can scrutinize spending with finer analysis.
Marketing is an investment. Success in ROMI requires budgeting, reporting and analysis in order to fully actualize the benefits.
In lean times, business owners have a tendency to cut marketing spend. Lost time and lack of investment, even during challenging periods, impacts long-term growth. The result may not be felt right away. It is an illusion. Prolonged periods of reduced marketing spend can dramatically reduce sales opportunities. The fewer dollars you put into a marketing budget the greater the exponential impact on future revenues.
Similar to an investment savings account, the more you put into your “growth” marketing account, the higher potential return on your investment. The more dollars spent on high risk marketing activities, the greater risk to returns. Any sound investment advisor, marketing or financial, will counsel a business owner and CEO to invest based on the organization’s risk tolerance. Marketing investments should be treated like any financial investment. Know your risk tolerance, invest accordingly. If the business has low tolerance for risk, eliminate marketing spend in expensive tactics that are difficult to measure. Always diversify your investment to mitigate risk.
In order to qualify for a return, it requires an investment. Failing to set aside funds to market is failing to invest in business sustainability. Expectations of sales without an adequate marketing budget is a business built on luck. Though we would all like to be lucky, if you plan to sell something, invest in marketing to create the sale.
“I have a problem with too much money. I can’t reinvest it fast enough, and because I reinvest it, more money comes in. Yes, the rich do get richer.” -Robert Kiyosaki