What you need to know to make smart financial decisions on marketing costs
Not long ago, I counseled officers of a fast-growing information technology firm on how to create a marketing budget. The company was generating tremendous margins, and its officers had a good grasp of their operating expenses. The hurdle confronting them was an inability to determine how much the company should spend on marketing. An elegant solution was needed.
I worked out a formula for the company, based on profits per unit. The formula had two distinct advantages. It enabled leaders to understand what they could spend on marketing. And, they now could rein in company managers pushing to spend a lot more on marketing than was justifiable.
How-to calculate your annual marketing budget
There’s a cost associated with marketing efforts, but your dollars are finite. Your company must establish a ceiling on how much it will spend on marketing over the course of the year. While it’s not often easy for start-ups to identify a marketing budget, they can establish a hard stop on marketing costs.
In start-ups, the money for marketing will come from start-up funds. Those funds may be from your own savings, or from moneys obtained from family or financial backers. Because these are important funds, they must be spent wisely.
That means addressing key costs in areas from lead generation to use of social media, from lead conversion to content creation.
But ultimately, the crux of the matter is your sales volume and margins. The question upon which marketing spending decisions hinge for start-up companies is, very simply, “How fast will the company’s sales volume and margins grow?”
As important as it is for start-up companies to get a handle on marketing costs, it’s equally important they don’t spend a disproportionate amount of time on that task. The overriding aim is to begin attracting customers and sales.
For established businesses, financial models can make the challenge of determining a marketing budget for the coming year much easier.
They already have profit-and-loss statements, and those statements can provide information that can be used in models to determine optimal marketing spend.
We know now why it is important to identify the amount a company will spend on marketing in the next 12 months. In the next blog, I will present a simple way to determine how much you can spend in the coming year.