Marketing must contribute to the profitability of a business - how much profit it makes. The marketing budget presents the cost of the marketing plan. It can include the cost of distribution and different marketing actions, such as advertising or market research. The annual marketing budget shows what the marketing department is planning to spend over the year. Management may ask the marketing team to justify or modify the budget before giving approval.
Budgeting approaches
There are several approaches to setting the marketing budget – that is, fixing spending on marketing - for example, investment in research or advertising:
■ the affordable approach
The company forecasts revenues (predicts the amount of money it expects from sales), deducts costs, and allocates a part of the remaining funds to promotion. Marketing is considered as a cost that can be cut (reduced), depending on what the company can afford - that is, how much money it has left.
■ the percentage of sales approach
A percentage of current or anticipated sales (what a company expects to sell) is allocated to marketing actions. Typically, ten percent of net sales is spent on promotion.
■ the objective-and-task approach
The company costs out, or calculates, the cost of reaching its marketing objectives. For example, new products will need large advertising budgets to build awareness.
■ competitive parity
Competitor investment is tracked, or monitored, and used as a rule of thumb (a guideline) to set the promotion budget. The objective is to beat (spend more than) or match (spend the same as) the investment of competitors.
Whichever approach is chosen, marketers need to respect the budget - that is, not go over budget (spend more than planned) or be under budget (invest less than planned).
Note: Another way of saying respect the budget is be on budget.
Return on investment (ROI)
Quotation: “Half the money I spend on advertising is wasted; the trouble is I don't know which half.” John Wanamaker, 19th century American department store owner.
Marketers are accountable for – that is, responsible for - their budget. They must demonstrate that their marketing actions are cost-effective (productive relative to the cost) and not a waste of money. The marketing plan establishes how to measure the return on investment (ROI) or the cost-effectiveness of different marketing actions - the amount of profit made based on the amount of resources needed to make it. Monthly, quarterly and annual reviews of performance against budget measure projected, or forecast, results against real performance - how the company actually performed. Many companies use statistics called marketing metrics to quantify the performance of their marketing activities. They can include items such as market share, advertising spend or response rates for direct marketing. To talk about the cost-effectiveness of marketing actions, marketers say:
| If we analyse the cost per | lead, client, response, | we can see that this | is a isn’ t a | cost-effective | way of spending our marketing budget. |
6.7 Match the two parts of the sentences.
1 Marketing should contribute
2 The marketing budget sets
3 The marketing director may need to
4 Companies track
5 Marketers should respect
a justify the marketing budget.
b the budget.
с competitor spending.
d to the profitability of a firm.
e out the cost of the marketing plan.
6.8 Complete the postings from a marketing website using words from the box. Then say which budgeting approaches are mentioned in the posts.
Afford allocate cost match objectives
Percent respect setting task thumb
Cut
(1) …… a Marketing Budget
Posted By Khouse:
Are there any rules of (2)….. for setting a marketing budget?
Posted by ChamberE:
I suggest using a mix of objective-and- (3) ….. and affordability methods. Decide on your marketing (4)…... Then determine and (5) ….. out the marketing tactics you need to implement. Finally, compare those costs with what you can (6) ….. to spend. You have to (7) ….. your budget. If you are over budget, you will need to (8) ….. costs.
Posted by MattAp:
It depends on what your competitors are spending. You need to (9)….. the spending of the market leader.
Posted by CathE:
There are guidelines by industry. What industry are you servicing? Many companies (10)….. a percentage of expected sales to marketing support. High tech companies can spend up to fifty (11)…. of net sales on promotion.
Posted By Khouse:
Thanks to you all for your responses. I can see it depends a lot on the type of business and its objectives. Thanks again - I appreciate your help.
6.9 Imagine that you are preparing a marketing budget for a non-profit organization. Explain the different possible approaches to setting the marketing budget to the organization's members.