The percentage of the net profit a business should invest in marketing is determined by several factors. The length of time a business has been in the market is the major determining factor. If the business deals with various types of products, it has to apportion its marketing budget to each of the products. It is harder for start-ups than the already established businesses, but they all need to set aside art of their net profit to invest in marketing. If a business has not started getting revenues, the owner will have to dig deep in their pocket.
The industry where your business falls in is another influencing factor. For example, industrial business-to-business organizations spend less than 1% of their total sales on marketing while many consumer products organizations spend more than half of their net profits to market new products. The rate at which you want to grow determines the amount you spend on marketing.
Rules for Creating a Marketing Budget
The general rule states that businesses should allocate 5% of net profit to the marketing budget so as to sustain their current position in the market. If the focus is on greater growth and larger market share, then a higher percentage (around 10%) should be allocated to the marketing budget.
The company or industry also determines the amount spent on marketing. Highly competitive industrieslike pharmaceuticals, retail and consumer products spend around 20-50% of the net profits on marketing.
An ideal marketing budget is calculated using the following formula:
Total revenue multiplied by 5%= budget needed to sustain brand visibility and awareness.
Total revenue multiplied by 10%= budget necessary to maintain growth and gain larger market share.
The rules discussed above are suitable for companies that rake in an average of six- figure profit numbers. Businesses that realize smaller margins should determine the amount to allocate a percentage of their revenue based on what their competitors are allocating. Much of this is a rough estimate since competitors do notshare information publicly. Most small businesses have to stretch their revenues to cater for the marketing budget.
The overall budget calculated by the rules of thumb caters for all expenses incurred when marketing. Marketing costs covered include: outsourcing, advertising, printing costs, cost of marketing staff and their overhead. It is important to note that business can only rely on word of mouth to a certain point after which it stagnates if a proper marketing procedure is not adopted.
Other Determining Factors
Other factors to take into account when you are planning a marketing budget are: launch of new products or services, mergers, acquisitions and new market entries. You should therefore make the necessary adjustments to accommodate these changes. A company should spend 10% of the gross sales per annum to market new products and services or 20% of new product sales and target revenue. The amount for consumer products business is of course higher than that for business-to- business companies.
Expected Returns on Investment
After an allocation to marketing budget, the next question to ask yourself is how much you can realize from that investment. It takes some time to answer because some marketing techniques take longer to yield results. A lead- generation strategy takes a shorter time to yield profits as compared to brand marketing strategy. Ensure that you assess the marketing strategy you choose before proceeding to launch it.
Careful measures should be taken when planning for a marketing budget to maintain brand visibility and avoid unnecessary losses. However, consistency in marketing and advertising a business will lead to increased profits. Learn to observe your profits and know what works for your business so that you can maximize it fully.