“How much money should you spend on marketing?”
A question that’s often difficult to answer, but is critical for businesses of all sizes.
Marketing budgets can be one of the most difficult expenses to calculate and justify. After all, marketing is an investment, not a cost and that’s why many business owners struggle with finding the right marketing budget.
The truth is, when it comes to the marketing budget, there is no magic number. The amount you should spend on marketing depends on several factors, including your business goals, target market, and competition.
However, there are some general guidelines you can follow to help you plan your marketing budget to ensure you are spending the right amount to reach your target market and achieve your desired results.
In this blog post, we’ll walk you through a few different scenarios to help you understand how to plan your marketing budget based on your specific business needs, stage of growth, and goals, and we’ll also share with you a few well-known ways for calculating your marketing budget.
Firstly, let’s take a look at the 4 different scenarios.
Scenario 1: You Have a Small Audience and a Limited Budget
If you have a small audience and a limited budget, it’s important to focus on reach rather than frequency. You want to make sure your ads are seen by as many people as possible, even if that means they’re only seen a few times. Why this approach?
Well, if you have a small audience, the first thing you need to do is grow it. At this stage, you’re not too concerned with brand recognition or recall, you just want to get your name out there and increase your visibility.
Facebook and Google are both good options for this, as they allow you to target specific demographics and interests.
Start with a small budget and increase it gradually as you get more data on what’s working and what’s not.
Scenario 2: You Have a Large Audience and a Limited Budget
If you have a large audience and a limited budget, reach is still important, but you also want to make sure your ads are being seen by the right people.
With a large audience, you have more room to target specific demographics and interests. This ensures your ads are being seen by people who are more likely to be interested in what you’re selling.
With retargeting, you can show your ads to people who have already visited your website or interacted with your brand in some way. And lookalike audiences allow you to reach people who are similar to your existing customers or website visitors.
Both of these strategies can help you make the most of your limited budget.
Scenario 3: You Have a Small Audience and an Unlimited Budget
If money is no object, then you want to focus on reach and frequency. The goal here is to get your ads seen by as many people as possible, as often as possible.
Facebook and Google are still good options, but you may also want to consider other paid channels like LinkedIn, Twitter, or even TV or radio.
It’s also important to keep in mind that even with an unlimited budget, you still need to be strategic about where you’re spending your money. Not all channels will be a good fit for your business, so it’s important to do your research and test different channels to see what works best for you, or you’ll just be wasting your money.
Scenario 4: You Have a Large Audience and an Unlimited Budget
If you have a large audience and an unlimited budget, then you have the luxury of being able to focus on brand building.
At this stage, you want to focus on frequency and making sure your ads are seen by the same people over and over again. You want your brand to be top of mind when they’re ready to make a purchase.
In this case, you should use a mix of paid and organic channels. Paid channels like Facebook, Google, and LinkedIn will help you reach your audience quickly, while organic channels like content marketing, PR, and email marketing will help you build a more long-term relationship with your audience, which is very important for brand building, especially in B2B.
Now that we’ve gone over the different scenarios, let’s take a look at a few well-known methods for calculating your marketing budget.
Well-known methods for calculating your marketing budget
3% Rule Of Thumb
The 3% rule of thumb is a very common method for calculating your marketing budget. It’s pretty simple: you just take 3% of your total revenue and use that as your marketing budget.
For example, if your company makes $100,000 a year, you would budget $3,000 for marketing.
This rule is a good starting point, but it’s not perfect. The problem with the 3% rule is that it doesn’t take into account your specific situation, like your audience size, the size of your company, your industry, or your goals.
For example, a company that makes $1 million a year and spends 3% on marketing would have a very different marketing budget than a company that makes $10 million a year and spends 3% on marketing. Or, a company in a highly competitive industry might need to spend more than 3% to be successful.
You can see how the 3% rule isn’t always accurate. So, while it can be a helpful starting point, you’ll need to do some more calculations to figure out the right marketing budget for your business.
Another popular method for calculating your marketing budget is to look at industry averages.
This can give you a good idea of how much other companies in your industry are spending on marketing, which can help you benchmark your own budget.
For example, tech and software companies spend an average of 12% of their total revenue on marketing, while companies in the healthcare industry spend an average of 7%.
You can find industry averages for marketing budgets by doing a quick Google search or by checking out reports like this one from Deloitte.
Once you have an idea of how much other companies in your industry are spending, you can use that information to inform your own budget.
However, it’s important to keep in mind that these averages are just that – averages. They don’t take into account your specific situation, audience, or goals. So, while they can be helpful, don’t follow them blindly. Use them just as a factor in your overall budget calculation.
Competitor spending is also a popular method for calculating your marketing budget. The idea is that you look at how much your competitors are spending on marketing and base your budget on that.
To find out how much your competitors are spending on marketing, you can look at their 10-K filings (annual reports filed with the SEC) or talk to industry analysts.
By looking at how much your competitors are spending, you can get a good idea of how much you need to spend to be competitive in your industry. For example, if your competitors are outspending you, they will likely have an advantage in terms of brand awareness and visibility, which could mean that you need to increase your marketing budget.
However, this may not always be the case. There may be other factors at play, such as the fact that your competitors have much more revenue than you do or they are just throwing money at marketing and not seeing results.
So, while competitor spending is definitely something you should take into account, it’s not the only factor you should consider when calculating your marketing budget.
There is no one-size-fits-all answer when it comes to calculating your marketing budget. The best way to figure out how much you should spend is to look at a variety of factors, like your audience size, the size of your company, your industry, your goals, industry averages, and competitor spending.
By taking all of these factors into account, you can come up with a budget that makes sense for your business.
What’s also important to keep in mind is that your marketing budget should be flexible. As your business grows and changes, so too should your budget. So, don’t be afraid to revisit your budget on a regular basis and make changes as needed.
To give you more insights, I’ve included information that Mathew Scianella shared on LinkedIn. We had Mathew as a guest on the Funky Marketing show a few months back. Here’s the link to that episode (make sure you listen to it).
He had a talk with Sam Kuehnle and asked him the following: “What’s an ideal budget relative to your audience size?”
Mathew’s initial thought was that there was an escalating number per thousands of dollars spent. So for instance… for every $1000 in budget your audience should be ~15,000.
But he didn’t know if that was a good assumption or not. Sam brought in a third variable he had not considered for the question – frequency.
As in, how much do you spend to reach a frequency of 2.5 to 3? From there, you can multiply by the number of ad variations you have and determine an appropriate budget for your audience.
“So if you have 9 ad variations, and it takes 1 variation $500 to reach your audience of 20,000 with a frequency of 2.5, then you will ideally want to budget $4,500 to reach that audience. Obviously, you will drop lower-performing variations in favor of better ones, and you can add more variations iterating off the top-performing aspects.”
And let me tell you, the frequency can show a lot, good explanation by Sam. It can also tell us about creative.
Sam added: “The creative insights are so incredibly valuable, yet often not used enough to inform future campaign creative to improve performance over time.”
And it’s true! I mostly see companies create just two and that’s all!
But let’s move this conversation back to you. How do you budget and iterate off your paid ad efforts?
Thanks for reading! I hope this was helpful in deciding what’s ideal for you and feel free to contact me if you have any questions! 🙂
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