Three Simple Ways to Estimate a Marketing Budget
For many businesses creating a marketing plan for the first time or thinking about launching marketing campaigns outside of regular referral or word-of-mouth business, it can be challenging to estimate a budget to cover expenses. You may have a firm understanding on how much things cost, but we often find that it’s much harder to know how much you SHOULD be paying towards marketing and advertising.
Marketing In-House or Outsourced?
One of the first questions you must answer is whether or not you have people on staff with the experience to properly build and execute your marketing plan. Someone on staff with little or no marketing experience can actually end up costing your business more as they may not have the training to measure return on investment (ROI) for marketing and advertising spend.
Additionally, if you’re a fairly new brand in your market, you really need to rely on consistency in your marketing efforts to remind your audience who you are, what you do, and what value you bring to them. Spending in spurts may feel like you’re saving money, but in actuality, it is probably reducing the effectiveness of your overall spend and your ROI.
Outsourcing all of your marketing and advertising is not always the perfect solution either. According to the Agency Management Institute, businesses say the biggest barrier to outsourcing marketing is cost. So while hiring an expert can immediately bring the right experience and skill to the table, you must do your due diligence in weighing how much it would cost your organization in on-boarding, salary, benefits and training an employee vs. the fees of a marketing agency or consultant.
1. Average Salary Range
One way to do a comparison of costs between hiring a marketing employee vs. a marketing agency, thus estimating a marketing budget, is by finding the average salary range of the position needed to accomplish your goals.
The Creative Group has a great Creative & Marketing Salary Calculator that utilizes the U.S. Bureau of Labor Statistics and data from thousands of job placements to give you the current average salary ranges for 85 different positions.
If you’re finding that the level of skill needed to execute your marketing plan is that of a director, and the average salary is $106,920, then divide that number by 12 (months) and you get a monthly marketing budget of $8,910. If an agency or outsourced marketing partner is able to accomplish your goals for less than that amount, then it may be wise to outsource.
2. SBA Rule of Thumb
The U.S. Small Business Administration recommends that businesses with revenues less than $5 million allocate 7-8% of gross revenues to marketing (assuming your net profit margins are >10%). You may want to speak to your accountant or CFO to gather these numbers, but the most important thing here is that you make sure that after your expenses, you will have money to put into marketing. The SBA has a nice startup costs worksheet to help you determine a quick budget.
If you are following a smart marketing plan, then your marketing expenses should be contributing to your company’s growth and profit margins, thus allowing you to contribute higher percentages back into marketing and advertising. If you’re in a competitive market, it’s not uncommon to see businesses budgeting upwards of 20% of their gross revenues back into marketing and advertising.
3. Reverse Cost of Acquisition
Savvy businesses who have a firm understanding of how much it costs them to acquire a new customer and what the lifetime value of that customer is, can use a customer acquisition formula to develop their marketing budget.
As an example, if your business sells a $10 per month service with an annual commitment, then you know each new customer is worth $120. To find out how much it costs you to acquire that one customer, you must first know:
How much you are spending on marketing to acquire the lead that will eventually convert into a sale
How much you are spending on sales to convert that lead to a new customer
How long it takes you to acquire a new customer (sales/marketing cycle)
So, let’s say our $120 customer takes 60 days to close and we have a monthly budget of $30 for sales and marketing efforts. Our customer acquisition cost (CAC) would then be $30. Brian Balfour, former VP of Growth at Hubspot does an excellent job of explaining this in his essay on how to actually calculate CAC. Brian’s formula is this:
Finalizing Your Budget
Once you have determined an estimated annual marketing budget, your next steps should be plotting that budget into specific campaigns and initiatives on a calendar and thinking critically about who, if anyone needs to approve your budget. Different people in your organization such as a CFO, CEO or CMO will most likely have unique questions on how the marketing budget will be used, and what your reasoning behind it is. Anticipating their questions and presenting the information in the way that they’ll appreciate will aid in getting the budget approved.