Stuck with a 'Percentage of Sales' Marketing Budget?
By Laura Patterson is president and co-founder of VisionEdge Marketing, Inc.
Tuesday, 22nd November 2016

There are no simple rules for determining a Marketing budget, this is because it should be based on the Marketing objectives you are tasked to achieve in support of business goals and often those objective, metrics, and goals are different for each company.

For a number of companies, the Marketing budget is still determined by a formula based on a percentage of anticipated sales. The budget is then handed to Marketing.

You know that this is a backwards way to run Marketing. It doesn’t make sense to establish a Marketing budget without first knowing the Marketing objectives and the strategies and tactics needed to support them. If your company is still handing you a percentage of sales Marketing budget, read on to learn how you can change the dialog and the process, either a little or a lot.  Find out how to effectively allocate your budget and be more successful.

Best Approach: Before you Talk Budget, Talk  Plan

Your Marketing plan provides budget guidance. To secure agreement from the management team your plan should identify measurable Marketing objectives tied to strategic business outcomes. The outcomes are the priorities of your leadership team. Everything Marketing invests in should positively impact the outcomes.

For each objective outline several scenarios along with the expected contribution and budget for each scenario. You can now show the relationship between the plan, budget and outcomes. Meet with the management team to select the priorities and preferred scenario for each objective. If you are told the total investment it too high, negotiate removing outcomes or reducing outcome metrics/goals.

The cost of this process will pay for itself as it focuses your efforts.  You invest money only on the programs that make sense for your business,.  This insures that you have sufficient budget to achieve the outcomes for which you will be held accountable. Plus, you’ll be able to avoid needlessly spending money on Marketing efforts that are perceived to have absolutely no return on investment.

Next, allocate your Marketing budget by the outcomes you are expected to produce. This is a very different way to budget. Gone is the outdated budget by activity.  Effectiveness and results take precedence.

Then determine the detailed appropriate tactics and activities that will achieve the outcomes. This enables you to focus on measuring the investment against a business result.

This process changes the conversation with your C-Suite and positions marketing, and you, as a strategic business partner.

This new route requires you to set performance targets. You will need customer data and models as follows:

  • Customer targets. Ideally your performance targets should be customer-centric. How many customers do you need, which ones (demographics), and where are they (geographics)? To determine these kinds of targets you will need customer acquisition, retention, conversion and purchase data.
  • Channel targets. Your customer journey maps provide insight into your customer segments and associated personas channel and touch point preferences.

With customer behavior data you can begin to build some  models that will guide or provide some rules for prioritizing marketing tactics. How? Create a scoring model based on existing customer behavior, such as likelihood to respond to calls to action. Why? These models help decide which segments should receive which kind of treatment and what kind of offer. The models help you focus on outcomes rather than efficiencies and economies of scale.

Your success ultimately depends on your execution and your ability to link activities in an appropriate sequence to achieve a specific objective. When you can do this, you can integrate metrics and marketing activities into streamlined marketing processes. Invest in marketing processes that focus on acquiring, keeping, and growing the right set of customers.

Next Best Approach to Allocating Your Marketing Budget

Not yet ready to take an outcome-based approach to budgeting?  Consider one of these alternative methods as a first step in the right direction.

  • The task method. This method identifies how much and what kind of tasks can be purchased at various budget levels. This approach is the most common and the basis for most sub-accounting systems. This is a cost-basis approach. Public relations, events, direct marketing, social, and so on are examples of using this method.
  • The historical method. This is a variation on the task method. The nuance with this method is that you base the budget performance on metrics rather than the cost-basis. You take the best results for a task and build your budget based on either replicating or improving on the performance target.
  • The benchmark method. This approach for budgeting takes what your competition and others in your industry are spending. You essentially allocate the budget by spending a set amount of money based on the industry “standards.”

What to Do Before the Next Budget Cycle to Avoid the Problem

Initiate a conversation with your manager or CEO before the budget cycle starts. Even “draft” numbers are challenging to change once they are on paper. Explain the outcome-based approach and why this is best for the overall success of the company.

Outline how you will work with the management team to select the priorities and preferred scenarios for each objective and how you will measure the marketing investment cost-effectiveness.

Download the Metrics Facilitate Annual Planning and Budgeting Process case study (case study 19).

Laura Patterson is president and co-founder of VisionEdge Marketing, Inc., a recognized leader in enabling organizations to leverage data and analytics to facilitate marketing accountability. Laura’s newest book, Marketing Metrics in Action: Creating a Performance-Driven Marketing Organization (Racom: www.racombooks.com ), is a useful primer for improving marketing measurement and performance. Visit: www.visionedgemarketing.com       

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