A common question we’re asked is: “How much should I spend on marketing my small business?” And to be honest, it’s a question we really don’t enjoy answering. There are several reasons for this.
First, there is no definitive answer to this question, because every business is different. Secondly, businesses should not regard marketing communications (promotion) as an expense. When performed correctly, marketing communications is an investment. Finally, the amount of money you will need to invest will depend upon your firm’s goals and SMART objectives. For example, let’s say your business is mature. Are you hoping to achieve incremental increases in sales? Or are you hoping to double sales? And, how soon are you hoping to achieve this growth?
Okay, how much should I invest in marketing?
Alright… if you insist, here’s the answer:
Invest as little as possible — the bare minimum — whilst ensuring you achieve the optimum return on your investment.
At Dymond Digital, our approach differs from that of our competitors’. Instead of trying to swindle you into spending more, we explain the various budget-setting methods so that you are fully aware of your options. We then try our best to design a strategy that allows you to achieve your goals, with the smallest possible investment. Armed with this information, you’ll be well equipped to make the best decision for your small business.
4 promotional budget-setting approaches
Businesses are able to use any one (or a combination of) the following four methods for calculating their promotional investment:
- Percentage of sales (actual or anticipated)
- Task method (investment injection tailored to a specific project)
- Competition-based (designed to match what competitors are investing)
- Maximum available funds (maximum investment, which the firm can afford).
Percentage of sales
The percentage of sales approach is the most commonly used promotional budget-setting approach of all. This is mainly because it’s easy to use. When using this approach, most businesses will usually base their investment budget on last year’s sales revenue. Alternatively the amount they invest can be calculated on estimated sales for the current year. The percentage of sales approach does have several significant drawbacks.
- It’s simple to calculate and apply.
- It can be based on a specific amount of investment (per unit), then multiplied by the projected (estimated) number of units a business believes it will sell in a given period.
- It is a very rigid approach in a constantly evolving communications environment.
- It is difficult to know the right percentage to invest. For example, approximately 60% of businesses allocate less than 4% of their sales revenue to promotion.
- It encourages reduced promotional investment during times of economic downturn (which can be unwise).
- It can facilitate over-investment in communications spending during prosperous times (which can be unwise).
We believe that the most effective approach for determining a promotional investment is the task-orientated approach. For instance, let’s consider an existing stationery business, with distribution currently confined to Queensland. Next, we’ll assume its owners would like to penetrate Victoria. In this case, the firm’s management should know its optimum promotional expenditure in Queensland. With this knowledge, it can quite easily allocate a similar budget to Victoria.
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- Designed specifically to achieve an identified objective. For example, to increase sales during traditionally quieter months.
- Encourages the business manager to apply thought to each task.
- Enables flexibility in light of constantly changing economic conditions.
- Allows a business with limited funds to allocate an amount they are willing (and can afford) to inject.
- Larger objectives will require larger investment.
- There is a possibility of under investing.
- There is also a possibility of over investing.
Some businesses decide to set a promotional budget that aligns with their competitors’. For example, Panasonic’s management might believe that rival electronics manufacturer, Sharp, has achieved success as a result of their intensive advertising. In response, Panasonic may decide to match this competitor’s promotional investment. Again, this method has some very obvious weaknesses, as listed below.
- If the replicated competitor has indeed formulated an effective promotional formula, great success can be achieved.
- The replicated competitor can undertake the testing and wear the risk associated with poor decisions.
- This approach assumes that the replicated competitor knows what they’re doing. However, as we know, assumptions are often wrong.
- It can lead to promotional overspending.
- Can only be performed where competitors are of a similar size. For example, an independent fresh food store cannot compete head to head with Coles or Woolworths.
- It is often very difficult to research a competitor’s expenditure.
Maximum available funds
Sometimes a marketer’s objective is to gain rapid market penetration or to maximise sales volume. To achieve this outcome, some businesses believe it is necessary to pour as much money as possible (i.e. as much as their business can afford) into promotional efforts. This is the most commonly used approach by marketers of new brands, goods and services.
Often the aim here is not so much immediate return on investment (ROI), but rather building business, brand or product awareness in the early stage of the product lifecycle.
- Maximum exposure within the firm’s realms of affordability.
- It can stimulate early uptake and consumption of new product.
- Assists in terms of accelerating the product into the growth phase of its product lifecycle.
- It is a high-risk approach due to the possibility of over-investing, therefore limiting cash flow.
- Inflexible in terms of being able to quickly adjust the selected promotional mix.
- Can cost an organisation more than it can afford in the early stages of the business lifecycle.