In the business world, a well-thought-out budget that fits the marketing task is often crucial to the success or failure of a company. A marketing budget is not just a number on paper, but a strategic tool that sets the direction for how resources are used to gain market share, retain customers and promote company growth. The importance of a suitable marketing budget cannot be overestimated - it is one of the factors that determines whether a company achieves or misses its goals.
What is a marketing budget?
A marketing budget includes all financial resources that a company plans and uses for its marketing activities. These activities can include advertising, market research, promotion, trade fairs, public relations, digital marketing measures and much more. The budget is usually set annually and is an essential part of a company's overall budget planning. A marketing budget is usually drawn up by the marketing department in close cooperation with the finance department and management. It serves to make the best possible use of the available resources and to ensure that all marketing activities are financially secure.
The History of the Marketing Budget
Marketing budgets have been used systematically since the early 20th century, when companies began to plan their marketing activities more carefully. A famous quote from Henry Ford illustrates the challenge associated with marketing expenditure: "Half the money I spend on advertising is wasted - the problem is, I don't know which half." This quote underlines the difficulty of quantifying the exact benefit of what were 100% offline marketing measures at the time, which made budget planning a challenging task. Today, things are a little different. The measurability and attributability of online marketing means that there are often very good ROI figures for the individual marketing instruments, which make planning easier.
Reasons for setting up a marketing budget
There are various reasons that make it necessary to prepare or review your marketing budget in detail. These include:
1. The introduction of new products or services: A new product often requires extensive marketing measures that require a corresponding budget.
2. Expansion into new markets: Entering new geographic or demographic markets requires additional resources for market research, advertising and promotion.
3. Changes in the competitive environment: Increasing competitive pressure may make it necessary to increase the marketing budget in order to regain, secure or expand market share.
4. Economic changes: In times of global economic uncertainty or crisis, companies may need to adjust their marketing spending to strengthen their position or to withdraw from markets.
Methods for setting a marketing budget
The size of the marketing budget can be determined in various ways, depending on the company's goals and strategy. Academic textbooks often suggest more or less extensive mathematical methods for this, but these are rarely applicable in practice. The following four methods have been established in particular:
1. Percentage of sales : One of the most commonly used methods is to set a certain percentage of sales as the marketing budget. This can vary depending on the industry and the size of the company. For example, technology companies often use 10-20% of their sales for marketing, while in retail it is more like 2-4%. It is interesting to ask whether the company bases its budget on planned future sales or on sales from the previous year.
2. Goal and task method : In this method, the budget is set based on the company's goals. What actions are necessary to achieve the set goals and what are the costs involved? This can also be called the waterfall method.
Example: The goal is to achieve 500,000 euros in eCommerce sales in the web shop. For this, with an average shopping cart of 500 euros, 1,000 purchasing customers are needed. With an excellent conversion rate in the shop of 10%, 10,000 visitors are needed. To get 10,000 shop visitors, with an SEA CTR (clickthrough rate of 1%), 1,000,000 ad impressions on Google are needed. With an average price per click (CPC = cost per click) of 1.50 euros, the 10,000 visitors cost 15,000 euros. The only question that remains is whether the keywords used can really reach 1,000,000 people on Google.
3. Competitive parity: Here the company orientates itself on the marketing expenditure of its competitors. The aim is not to lag behind in comparison or to do more than the competitors. The difficulty usually lies in finding out how high the competitors' budget actually is and what it consists of. For certain industries, industry associations have studies on marketing expenditure that can be used as a benchmark to check your own budget.
4. The "what can we afford" method : This conservative method is based on the available financial resources after all fixed costs have been covered. The question is again: do you base your decision on the past, the present or the planned future? If you wait for the sale and then see what is left, you can only do reactive marketing and not proactive marketing. Marketing is not seen here as an investment with a predictable ROMI (return on marketing investment), but rather as a necessary evil or "nice to have".
Review of the appropriateness of the marketing budget
To determine whether the marketing budget is sufficient to achieve the set goals, companies must regularly compare their expenditure with the results achieved. Key performance indicators (KPIs) such as sales growth, market share, return on investment (ROI) and customer acquisition costs provide indications of whether the budget is appropriate.
Persuasion and possible blockages
Typically, the marketing department must justify the budget set to the management or the CFO. These decision makers have the final say on the size of the budget and can also cut or block it if they do not see the benefit or see other financial priorities, e.g. expanding production facilities.
Differences according to company size and industry
The size of the marketing budget varies greatly depending on the size of the company and the industry. Large companies can often afford more generous budgets, while small companies have to pay more attention to efficiency. Industries such as technology and consumer goods traditionally invest higher percentages of sales in marketing, while industries such as the steel industry spend significantly less on marketing. Targeting consumers is also usually more expensive than targeting business customers, as the number of potential customers is smaller and they can usually be reached more specifically.
Concrete examples:
- Technology companies: 10-20% of turnover.
- Consumer goods industry: 5-10% of sales.
- Retail: 2-4% of sales.
- Automotive industry: 2-5% of sales.
Summary
An appropriate marketing budget is of central importance for the success of a company. It ensures that all marketing activities are financially secure and that the set goals can be achieved. Companies should plan their marketing budget carefully, review it regularly and adjust it flexibly in order to be able to react to changes in the market environment. It is important to convince the decision-makers in the company of the need for a sufficient budget to ensure that the marketing goals are not missed due to a lack of funds. A well-thought-out marketing budget is therefore not just a cost factor, but an investment in the long-term success of the company.
Author:
Dr. Frank Lampe, independent online marketing consultant, author, lecturer and long-time marketing executive for B2B technolgy companies and startups.
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