Thursday, November 11, 2010

How to Determine a Marketing Budget for a Small Business – A Groundhog View Out of Thin Air

Okay, so my good friend and colleague Jim Peake of SpeechRep Media, Inc is always talking to me about marketing and how he advises his clients on how to determine their marketing budgets. Our conversations are always full of golden nuggets and really should be published half of the time (good times Jim!) so this time I finally said, "You know what Jim, that's great advice, you should really write a piece About it..." and just like magic, look what popped into my e-mail account this morning:

How to Determine a Marketing Budget for a Small Business – A Groundhog View Out of Thin Air

First I must tell you I usually need a calculator to add 2 + 2, or if I use my fingers that works too.  OK now that I have your attention let’s talk about marketing and figuring out what a marketing budget should be.  I can go and find any financial genius and they can give us all kinds of strategies for coming with the perfect number probably down to the exact penny.

The owner of the business, the CEO usually has the last say in what gets approved and nixed.  So let’s say we have a services business, a hair salon, a consulting firm, an accounting firm, law offices or a graphic designer or you name it, pick the SIC code we want to figure out what it will take to market our business and do so profitability so we can continue to stay ahead of the curve.

Marketing is the Engine that Pulls the Train

Let’s face it, marketing is the engine that pulls the train and sales is the conductor.  Without profits we are screwed unless you are Rudi Dekkers.  (Google him up if you don’t know who he is).   So in my world our revenues must exceed our expenses.  If that is not the case we are bleeding red ink and if we bleed red ink we probably don’t have a license to print money or make new dollar digits.  So as a benchmark I have come up with a minimum starting percentage.  

Side note on sales, these sales guys get really expensive really fast and only about 5% will generate about 80% of your profits another number I pulled out of thin air, maybe you can confirm it.  They drive expensive cars, eat at expensive restaurants and love racking their expense accounts to the max because they deserve it and are entitled, or at least some think so.  My point here is marketing should be giving these guys high quality leads ALL the time so we can boost the 5% to a more acceptable number, however in my experience accounting is always trying to “cut expenses in sales” via marketing and they wind up sucking wind in the long run.  I know this first hand because I lived it.
This percentage is based on my experience and NOTHING else.  So I am pulling this number out of thin air, however it seems to work well for a starting point.  We need to spend at least 20% of our monthly revenue on marketing if we are going to get any real measurable results in the first 3-4 months.  This includes marketing assistants, VP’s, 800’s, web designers, ad agencies, market research, social media, SEO, link building PPC, article writing you name it.

If after spending 20% you are getting too much business start to spend less.  On the other hand if you are not making a profit with a 20% marketing budget it is time to do two things, either spend more so you do get enough business to make a decent profit or stop what you are doing and change fast, for example hire a website consultant or a competent internet marketing consultant and start to test other methods of getting revenue going where your expenses do not exceed your revenue.

This is where the rubber meets the road

OK, so some dude who wrote this on the internet says 20% is the good starting number what the hell does he know?  He knows very little, but has 30 years experience in business.  However what he does know is if you spend for instance $10,000 per week on marketing and you can generate $40,000 per week in revenue that is called a 4:1 MER or media efficiency ratio.    So what happens when we increase that weekly spend to $100,000?  It should generate $400,000 in weekly revenue.  Depending on your profit margin this is either a good ratio or a bad ratio.  Hopefully you have enough margin it is a “good ratio.”

If you are spending 5% of your monthly revenue on marketing and not getting your results, but the marketing you are doing is working why not spend more?  Oh, the CFO says we have to “cut back.”  Well let’s cut back and we can cut ourselves out of a job too.  I will also tell that CFO he is not in business to make money and this thing he calls “work” is something of just a “pet hobby” and not a business and he is sucking others into his “pet hobby.”  If we operate out of fear of failure chances are we will get there, it’s happened to this search marketing consultant, I speak of experience.

On the other hand, if we boost the 5% monthly marketing budget to 20% and start to get the results and the profits then let’s do more of it and refine the marketing efforts even more.  Test different offers, different calls to action, different media….testing……testing…..testing…..success…..roll out baby!  I know this is an over simplification rant of sorts but if we are “going to play it safe” let’s do that in shuffle board and curling, if want to play it safe let’s play it safe when we retire.

When it goes wrong – Change Thinking

When we are spending as much as we can let’s say 40% of our monthly revenue and we can’t keep our customers and we can’t make a profit it is time to reevaluate the whole business situation.  Ask why?  How can we do it better?  Are we going after the right customer?  As Einstein said, "We can't solve problems by using the same kind of thinking we used when we created them."  So do something, pick up the phone and call a website consultant or a internet marketing consultant, or do nothing and “play it safe.”

About the Author: 
Jim Peake is a website consultant, internet marketing and management consultant with special focus on healthcare marketing in the behavioral health and addiction treatment industry. He helps businesses improve their identities, branding, web presence, traffic generation, lead generation, SEO, PPC, online as well as offline, video production, video optimization and syndication. He uses advanced direct response advertising techniques; Jim also helps sellers meet buyers of businesses and is active in social media marketing.

1 comment:

Robert said...

A good analogy:Marketing is the engine that pulls the train. Very true!