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"I have worked with many business marketing experts or gurus and Carol is the very best of all of them."
L. D.
Business Mentor,
Business Finance Expert

May 7, 2012

Marketing for Growth

Part 2 of 3 - Determining How Much to Spend

By Carol Aubitz


The second most-asked question I get when working with business owners on their marketing is, "How much should I spend on advertising?"

This is another question where the answer is different for every business. There is no magic formula, despite many industry standards that suggest you should spend a specific percentage of your gross income on advertising.

The amount of your advertising and marketing expense will be dictated by the type of business you own, the return on investment you get from different types of marketing sources, and the level of growth you need or hope to achieve.

You can't start planning your budget until you've determined how much growth you want or need, and whether that growth is coming from existing customers or new ones. (See my Muse from April 30 for more information about that process.)

After you have determined your growth needs, here is a simple way to develop a marketing budget.

STEP 1 Calculating Your Budget

1. Get your gross revenue figures from last year. Subtract your cost of goods sold for last year from your gross revenue. Divide the remaining revenue by the number of active customers for last year and you'll have an average net revenue per customer.

Note: If you use an accounting system such as QuickBooks, there are reports that give you this information.

2. Then take your cost of operations and overhead from last year (this includes payroll, rent, utilities, outsourced services, insurance, benefits, etc.) and divide that by the number of customers. This is your contribution to overhead cost per customer.

3. Subtract the contribution to overhead cost per customer from the net revenue per customer and you'll get an adjusted net profit per customer. Decide if you can use all that profit for growth or if you need to keep some of it for development and risk protection.

4. The money you have kept for growth is the amount of money you can spend per customer. Multiply that by the number of new customers and additional transactions you need for the growth you want, and you'll have your marketing budget.

STEP 2. Allocating Your Budget

Now that you have a budget, it is important to spend it where it will get you the best results. The best allocation of a marketing budget is:
  • Put 60% into continue using marketing sources that work.
  • Put 25% into improving marketing sources that have had marginal success.
  • Put 15% into testing new marketing sources.

This allocation gives you a foundation to build on for the future. The 60% in sources that work minimizes the risk in your marketing spending. By putting 25% into improving marginal sources you can either notch them up into being profitable for you, or prove that you can't make them work so you drop them from further consideration. The 15% you put into testing new sources gives you opportunities to explore sources you might otherwise never have used. When you test a new source, and it works for you, you've just expanded your options for no-risk or low-risk growth in the future.

STEP 3. Prioritizing Your Sources

For most small businesses, word of mouth seems to top the list of what works best for getting new customers. For many businesses this happens without any marketing expense. Consider how many more referrals you would get if you had a referral rewards or incentive program to grow this source.

The final step in setting up your budget is to list all the methods you can use to motivate growth, then prioritize the list by those with the best return for the cost. In addition to word of mouth, here's a list of sources you could use. Prioritize the ones that work for you, and keep the others in mind as potential sources to test.

Signage: Store signs, vehicle signs or wraps, outdoor advertising such as billboards and buses, posters, in-store displays, banners.

Digital Media: Your website, social media (Facebook, LinkedIn, etc.), emails, online ads, listings on other websites, online yellow pages, blogs, search optimization, white papers.

Print Media: Newspapers, yellow pages, magazines, flyers, direct mail, newsletters, calendars, fact-sheets

Publicity: Press releases, postings in neighborhood locations & bulletin boards, door hangers, canvassing.

Events and Sponsorships: Workshops, demonstrations, open houses, fundraisers, benefits, trade shows, school, church and club functions.

Promotions: Sales, giveaways, contests, seasonal specials and shows, new product or service introductions, in-store activities, gifts, gift cards.

Networking: Business and trade groups, memberships in professional and social organizations, community projects.

Broadcast Media: Radio, local network TV, cable TV, online videos, DVDs.

Bartering: Partner with complementary/non-competitive businesses, trade brochure display space with other companies, ridealongs and package inserts, co-mingled direct mail, cross promotions to each others' customers.

As you look at all these sources, put costs to them. Some sources require little out of pocket expense, but require large amounts of time for management, planning and execution. Others require larger monetary expense, but once done there is no additional time or expense required.

When evaluating sources such as networking, remember to put the cost of your time as an expense. Time spent networking is time not spent on some other function in your business, so it needs to be a smart way to market based on return on investment.

Also evaluate the overall market reach, penetration, impact and brand-building awareness of each source. Those are additional benefits that can help solidify your market position for the future. With your marketing budget established, and your sources evaluated, you're now ready to start creating your marketing plan.