What Is the Rule of Thumb for Budgeting and Marketing?
Business owners frequently find allocating an appropriate marketing budget a challenge. Some business owners fall for the temptation to fund marketing as an afterthought -- in much the same way they purchase new equipment if extra profits appear -- and typically with poor results. Business owners who treat marketing as a basic cost of business follow certain rules when establishing a budget.
According to the U.S. Small Business Administration, numerous businesses operate under a rule that a marketing budget should run approximately 2 to 3 percent of annual revenue for established businesses, under the assumption of no significant changes in marketing tactics. This increases for start-up companies to approximately 3 to 5 percent. Despite these trends, the agency suggests a marketing budget of approximately 7 to 8 percent of revenue, split between branding and promotional efforts. A different version of the 2 to 3 percent approach calls for allocating 2 or 3 percent, or some other predetermined percentage, of the prior year’s entire business budget.
An alternative rule of thumb suggests that a business devote approximately the same amount to marketing as comparably sized competitors in the same area, or more. National statistics about percentages or totals spent on marketing provide limited guidance to businesses that operate and compete in a relatively localized area. If your nearest competitor spends half the national average, outspending him 2-to-1 may help you dominate the local market, or it may just cut unnecessarily into your profit margin. Determining how much your competitors spend may prove work-intensive, since they probably won’t disclose the number, but you can cobble together rough estimates by exploring what it would cost you to run similar campaigns in the same communication channels.
A different type of approach to establishing a marketing budget involves performing an annual review process. The review examines what marketing activities the business used the prior year and determines which activities the business plans to maintain. Updated cost estimates for these activities form the core budget. The process also includes a review and selection of potential new marketing activities. Estimated costs for the new activities create the remainder of the budget, and funds are allocated.
Industry plays a significant role in determining the appropriate marketing budget size. Large retail outlets, for example, can spend over 20 percent of revenue on marketing programs. Location can also impact marketing budgets, as the base costs of marketing tend to be higher in urban areas than in suburban and rural areas, for equivalent ad size or length in similar communication channels. Business owners should also refrain from spending beyond what they can actually afford, regardless of whether the final marketing budget lines up with any particular rule of thumb.