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Marketing Budget

Marketing Budget

Budgeting might not be the first thing that comes to mind when you think of marketing, but it is a prerequisite to any promotional activity. Without a budget, many marketing campaigns would never materialize. In addition to covering employees' salaries and software expenses, a significant portion of the marketing budget would go to communications tasks like advertising and PR (Public relations).

You might assume that the marketing budget is a fixed amount set by someone high up in the hierarchy (like a financial director or CMO), though the reality is it can vary depending on the purpose and value of the marketing campaign. Let's take a closer look at them!

Marketing Budget Definition

So, what exactly is the marketing budget?

The marketing budget is the total amount of money allocated to marketing activities.

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 affordable method involves determining the budget based on how much the company can afford to spend.

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.

The percentage-of-sales method allocates a percentage of current or forecasted sales to the promotional budget.

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

For example, decision-makers within the firm would determine that 20% of this year's sales will be allocated to next year's marketing budget. If the company generates $1 million in sales revenue, the budget would be $200,000. However, if the company generates only $500,000 in sales, the budget would only be $100,000.

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.

The marginal analysis method sets the marketing budget at a level where marginal revenues are equal to the marginal costs of a campaign.

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.

Director's decision method involves setting the budget based on what the director or manager decides.

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.

The inertia method involves setting the budget at a specified level or even a fixed sum unless something changes in the company.

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.

The competitive parity method involves setting the promotional budget at the same level as competitors.

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.

It is important to note that just because you spend the same amount on advertising as your competitors, does not mean that you will be equally successful.

Marketing Budget: Objective-Task Method

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

The objective-task method sets a budget based on the campaign's objectives and the resources required to achieve them.

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:

Less than half (47.9 percent) of companies include expenses for marketing employees in their marketing budgets. Other companies may put marketing employee expenses into general and administrative expenses, sales, or other areas.” 1

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.

Digital marketing budget

Nowadays, the digital marketing budget plays an increasingly significant role in organizations' marketing efforts. According to Deloitte's Chief Marketing (CMO) Survey, digital marketing's contribution to company performance increased by 33% in 2020. Additionally, budget allocations to mobile marketing and social media marketing are expected to grow in the upcoming years, with mobile representing 36% and social representing 25% of the total marketing budget.2

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

Marketing Budget - Key takeaways

  • The marketing budget is the total amount of money a business allocates to marketing activities.
  • A marketing budget is essential to ensure that a company does not spend too much or too little on its marketing functions.
  • Marketers might use the affordable, percentage-of-sales, marginal analysis, competitive parity, and objective-task methods to construct a marketing budget.
  • What companies include in their marketing budgets can vary significantly based on the industry they operate and the types of customers they serve.
  • Nowadays, the digital marketing budget plays an increasingly significant role in organizations' marketing efforts.

References

  1. Christine Moorman and T. Austin Finch. Marketing Budgets Vary by Industry. Content by Deloitte for The Wall Street Journal. 2017. https://deloitte.wsj.com/articles/who-has-the-biggest-marketing-budgets-1485234137
  2. Deloitte. Deloitte study: digital marketing spending is expected to increase by almost 15% until the end of 2021, while traditional advertising will slightly decrease. Press Release. 2021. https://www2.deloitte.com/ro/en/pages/about-deloitte/articles/studiu-deloitte-bugetele-pentru-activitatile-de-marketing-digital-vor-creste-cu-aproape-15-pana-la-sfarsitul-anului-2021-iar-publicitatea-traditionala-va-scadea-usor.html
  3. Paul Talbot. How Deloitte Helps Clients Build Better Marketing Budgets. Forbes. 2018. https://www.forbes.com/sites/paultalbot/2018/10/16/how-deloitte-helps-clients-build-better-marketing-budgets/?sh=236488f54590
  4. Marc Paulenich. Keys To Creating A Solid 2022 Marketing Budget. Forbes. 2021. https://www.forbes.com/sites/forbesagencycouncil/2021/11/29/keys-to-creating-a-solid-2022-marketing-budget/?sh=1a268a96270c

Frequently Asked Questions about Marketing Budget

A marketing budget should be allocated based on the individual company's needs. This will depend based on the industry they operate in and the types of consumers served. For instance, some companies might allocate most of their budget to digital marketing, whereas others might only allocate one-third of the budget to digital and focus on traditional marketing.

What companies include in their marketing budgets can vary significantly based on the industry they operate and the types of customers they serve. Typically, 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.

Budgeting for marketing is important as it helps companies measure performance, have an effective overview of finances, ease the optimal allocation of resources, and ease marketing planning.

Whether salary is included in the marketing budget is dependent on the type of company. However, typically, employee salaries can be included in the marketing budget.

Some factors to consider when making marketing communications and budget allocation decisions include deciding the campaign's objectives and determining the tasks needed to achieve these objectives. As a result, we can set the budget based on the costs of completing each task. This is known as the objective-task method for budget allocation. However, there are multiple other methods marketers can use to allocate communications budgets. 

Final Marketing Budget Quiz

Question

The _________ is the total amount of money a business allocates to marketing activities.

Show answer

Answer

marketing budget

Show question

Question

What aspects should decision-makers assess to create an overall marketing budget?

Show answer

Answer

  1. The external environment,

  2. The competitive environment,

  3. The internal environment and capabilities,

  4. Internal performance,

  5. The marketing audit.

Show question

Question

At times, the total marketing budget is not decided by marketers, but by the directors and executives of the company. 

Show answer

Answer

True

Show question

Question

The ______ method involves determining the budget based on how much the company can afford to spend.

Show answer

Answer

affordable

Show question

Question

What is the process for setting the budget using the affordable method?

Show answer

Answer

  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.


Show question

Question

The affordable method is often used by startups or small businesses that cannot afford to spend much on communications. 

Show answer

Answer

True

Show question

Question

The __________ method allocates a percentage of current or forecasted sales to the promotional budget.

Show answer

Answer

percentage-of-sales

Show question

Question

Using the percentage-of-sales method, the budget is set at a predetermined level of ____, ______, or ______, sales. 

Show answer

Answer

past, current, or future

Show question

Question

The budget may vary significantly year-to-year if the company's sales are unstable. This is a characteristic of the _______.

Show answer

Answer

percentag-of-sales method

Show question

Question

The _________ method sets the marketing budget at a level where marginal revenues are equal to the marginal costs of a campaign.

Show answer

Answer

marginal analysis

Show question

Question

This method works on the basis of calculating how much additional revenue is created from a unit increase in advertising expenditure.

Show answer

Answer

marginal analysis

Show question

Question

The inertia method for setting marketing budgets can lead to innovative results.

Show answer

Answer

False

Show question

Question

The ________ method involves setting the promotional budget at the same level as competitors. 

Show answer

Answer

competitive parity

Show question

Question

To use the ________ approach, companies closely examine other companies' spending and set their budget based on the industry's average.

Show answer

Answer

competitive parity

Show question

Question

Define the objective-task method.

Show answer

Answer

The objective-task method sets a budget based on the campaign's objectives and the resources required to achieve them.

Show question

Question

What are the three steps for using the objective-task method?

Show answer

Answer

  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.

Show question

Question

What companies include in their marketing budgets can vary significantly based on the industry they operate and the types of customers they serve. 

Show answer

Answer

True

Show question

Question

Name two of the elements included in a marketing budget.

Show answer

Answer

Any of: 

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

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

  • Agencies and consultants, 

  • Employee salaries, 

  • Events, 

  • Training and development.

Show question

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