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- Marketing Glossary
Establishing Your
Marketing Investment
By Mark Levit
One of the questions we’re asked most often is “How much should I budget for advertising and promotion?” There’s no easy answer. However, following a year of research, Partners & Levit has established
the Budgeting Dicta implemented by major marketers in a range of business categories. We’re pleased to present them to you in this multipart series.
Marketing budgets have traditionally been established as a ratio-to-sales. But it’s more relevant to examine budgets relative to the level and growth of sales in a given market. To understand why, let’s consider the case of two businesses in a market with total sales of $100 million. Firm A has sales of $40 million,
while Firm B has sales of only $10 million. Both have marketing budgets set at 10% of sales. Therefore, Firm A invests $4 million a year on advertising and promotion, while Firm B invests only $1 million. Naturally we would expect Firm A’s marketing impact to be far greater than Firm B’s. While the traditional marketing-to-sales ratio suggests that they are making an equal effort, 10%. But Firm A is actually exerting four times the effort of Firm B.
The tendency to focus on the traditional marketing-to-sales ratio is not surprising, though. While a business knows its current sales and can make reasonable estimates of future sales, it may be more difficult to define total market sales. But a clear understanding of the appropriate market size and the rate of growth in that market is essential to establishing marketing investment levels. Notice the term market rather than industry is used. One can speak of the computer industry and then of particular markets within that industry, such as server, desktop and laptop. Each market has its own arena of competition and forms the base against which to measure investment levels.
Let’s begin by establishing the average marketing budgets and mix for all businesses.
The average business devotes about one-third of its advertising and sales promotion budget to media and two-thirds to promotional initiatives. This mix varies depending on the marketer’s strategic position as well as market objectives.
But there are a number of other variables that may affect marketing investment and productivity making this calculation alone inadequate. Managers must analyze other criteria.
In other articles, we discuss the Budgeting Dicta in length to help you invest wisely in your business.
If you’d like to discuss the budgeting cycle and how to plan for it, contact our Managing Partner, Mark Levit at 212.696.1200 now.
