Marketing Budget

Marketing Budget Definition

So, what exactly is the marketing budget?

A marketing budget ensures that a company does not over- or underspend on its marketing functions. Some of these functions include product development, market research, advertising, salaries, communications campaigns, agencies, etc.

To set a marketing budget, marketers have to consider:

1. The external environment,

2. The competitive environment,

3. The internal environment and capabilities,

4. Internal performance,

5. The marketing audit.

The final marketing budget is not decided by marketers, but by the directors and executives of the company. However, marketers are responsible for calculating promotional costs and reporting to high-level managers for approval. The following section will focus specifically on how marketers set promotional budgets.

Marketing Budget Categories

First, let's take a look at marketing budget categories. Marketing budget categories showcase different methods marketers can use to set a promotional budget. Here are five common marketing budget categories:

Marketing budget: Affordable method

The affordable method for determining a marketing budget is relatively simple. Management determines how much the company can afford to spend on marketing activities.

The process for setting the budget is as follows:

1. Calculate total revenues.

2. Deduct the costs associated with production, distribution, and other operating expenses.

3. Decide how much profit to retain.

4. Determine the remaining value – this sum can be spent on the marketing budget.

As the name suggests, the affordable method is highly cost-efficient. It is often adopted by smaller firms or startups that cannot spend too much on marketing. However, this approach is neither effective nor analytical. Marketers can't use it to analyze the impact of the promotional campaign. It is also more internal than market-oriented. When possible, companies should avoid using this method for budgeting.

Marketing Budget: Sales-Focus

There are two sales-focus methods for calculating marketing budget: percentage-of-sales and sales-based.

Percentage of sales method

The percentage-of-sales method follows the idea that a certain percentage of sales revenue should be allocated to promotional expenses.

As a result, the budget is set at a predetermined level of past, current, or future sales.

As can be seen from the example above, marketing budgets can vary considerably from year to year depending on the company's sales. This makes planning a marketing budget in the long term difficult (as the amount of sales revenue would determine how much is allocated for marketing).

Another issue is that while promotion and advertising help to create demand and generate revenue, it is not the result of past sales. Promotional expenses and sales are often at odds. When sales are high, marketers can cut back on their marketing budget (as people are already aware of the products or services). But when sales are low, they will need to spend more on marketing to stir up demand and excitement. Thus, using the same percentage of saleb every year can limit the company's marketing performance.

The marginal analysis method

The marginal analysis method is also a sales-based budgeting method and is hence also referred to as the sales response model.

This method works on the basis of calculating how much additional revenue is created from a unit increase in advertising expenditure. It also calculates how sales increase after a percentage increase in the promotional budget. The marginal analysis method argues that companies should stop spending on communications when marginal revenues equal costs.

Marketing Budget: Director's Decision and Inertia

Another popular method of establishing a marketing budget is the 'director's decision' method.

While the director's decision is simply the decision-making process, it might not be the most efficient, as the senior managers are not directly involved in the marketing environment, and therefore don't have a full grasp of the customers' needs and micro-strategies.

Another such judgment-based method is the inertia method.

Again, this budgeting tactic is not optimal as it may lead to stagnant marketing results. Innovative marketing strategies often require slight budget adjustments. These strategies typically also involve a certain level of risk but may prove highly successful, especially in today's ever-changing marketing environment.

Marketing Budget: Competitive Parity

Budget decision-making can be based on the external environment. Marketers can sometimes also use the industry benchmark to set their own marketing budget. This is called the competitive parity budgeting method.

To use this approach, companies must closely examine their competitors' spending and set their budgets based on the same level. The limit of this approach is that it does not consider the different promotional tools and tactics that other firms use to engage their customers and generate demand.

Marketing Budget: Objective-Task Method

Finally, the objective-task method sets the promotional budget based on the tasks required.

The process of using the objective-task method is as follows (see Figure 2 below):

1. Determine the campaign's objectives,
2. Define the tasks needed to complete the objectives,
3. Set the budget based on the costs of completing each task.

This method is advantageous as it is relatively simple and encourages managers to stay on task to achieve set objectives. It also provides a cost breakdown and allows for insightful analyses of how budget expenses lead to marketing results. However, the cost of each resource or task may vary slightly, as they are simply estimates. Additionally, the method does not consider opportunity costs.

Marketing Budget Allocation

Now, let's take a closer look at marketing budget allocation and the reason companies even set marketing budgets.

Companies allocate marketing budgets to have an overview of finances and ease marketing planning. What companies include in their marketing budgets can vary significantly based on the industry they operate in and the types of customers they serve.

Overall, the marketing budget is allocated to elements like:

• The communications mix/campaigns – advertising, promotion, public relations, etc.

• In-house tools – software, programs, etc.

• Agencies and consultants,

• Employee salaries,

• Events,

• Training and development.

However, companies do not have to draw up a budget for all the abovementioned elements. For example, according to The CMO Survey conducted in 2016:

Similarly, certain companies may include direct expenses and social media spending, whilst others may dismiss these elements from their marketing budgets. How can businesses create a marketing budget for all these differences? The key is to adopt a standardized approach with five main steps:

1. Identify marketing objectives,

2. Understand the market and target audience,

3. Conduct competitor analysis,

4. Determine marketing channels,

5. Set the marketing budget.

Marketing Budget Example

Before you go, let's look at a marketing budget example through a mini-case study.

Paul Magill, managing director and CMO services leader of Deloitte, mentioned that many companies face with their marketing budgets because many business opportunities remain underfunded. The marketing budget often remains the same each year, and making marketing investments is considered high risk. However, these investments often provide great opportunities in today's fast-moving markets, and thus marketers should ingrain flexibility into their budgets.³

As a result, to construct an effective budget, marketers should keep the following three questions in mind:

1. Is the budget flexible?

2. Is the budget efficient?

3. Is the budget measurable?

In addition to answering "yes" to these questions, marketers should find a fine balance between investing in technology and talent, pay close attention to current market trends, and invest in performance marketing, building long-term brands, and social listening technology to construct an effective marketing budget.⁴