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How to determine your marketing budget

Small business owners, whether in ecommerce or brick and mortar, should never overlook the importance of marketing. No matter how good your products or services are, people need to hear about them first - and marketing is the best way to spread the word and increase sales.

Yet many online business owners believe that marketing begins and ends with their social media feeds. Word of mouth and community are great ways to build buzz and garner loyal customers - and retailers love social media because for the most part, it's free. But in reality, building a customer base requires some more upfront investment. Spending money on marketing is intimidating, especially for a new or small business where margins are already razor thin.

While it's easy to spend too little on marketing, it is also possible to spend too much, or spend what little budget you have on the wrong kind of marketing. Here are a few tips for crafting a budget and spending it wisely.

Defining your marketing budget

There are several methods that businesses use to calculate a hard budget number. Choosing the right one depends on the size of your business, how long you've been in operation and your current sales.

Percentage of revenue

Economists debate over the exact percentage, but in general, most small businesses allocate between 7 to 12 percent of their total revenue to marketing (in this case, total revenue refers to all of the money generated through sales before expenses are taken out).

One of the main advantages of this percentage approach is that the budget is not fixed. It will grow along with revenue, increasing your marketing presence as your business expands. It also discourages overspending, keeping a close reign on extravagant campaigns and ensuring your long-term profitability.

However, the U.S. Small Business Association recommends that you should only utilize a percentage of your revenue for marketing if your margins fall at or above 10 to 12 percent (margin refers to business income after expenses, i.e. net income).

If your business is only barely covering costs - or worse, operating at a loss - then a 7 to 12 percent marketing budget may not be wise or practical. There is, of course, a trade-off with any such calculation. Marketing is required for growth, and it's not always a bad idea to cut into already narrow margins to increase overall sales later.

New businesses, which have no sales history and therefore no concrete revenue numbers, will have a difficult time using this formula. You can estimate your revenue and base your percentages off of the estimate, but this is dangerous. If your estimates are too high, then you may overspend — depleting your capitol.

Overall, this calculation works for businesses that have been operating for a while, and indeed, most businesses should adopt this model.

Fixed budgets

A new business may have to be more careful with their money, so an alternative option is to use fixed budgets. In your first year, you may simply have to find an amount that you feel you can afford and stick to it. It is essential, therefore, to have a marketing plan. A small, fixed budget may only cover one campaign or event.

Do your research and find out what type of campaign will have the best impact. Work backward by first determining what you hope your marketing will accomplish. Be specific — do you wish to gain a set number of followers on social media? Increase sales by a certain percent? Increase your search rankings? Once you know your targets, a strategy is easier to craft.

As for how much to spend: that depends on how much capitol you have on hand after other costs are covered. Ask other business owners in a similar bracket what they typically spend on marketing. Research your competitors and calculate their budgets. Be realistic: In all likelihood, is not your competitor — don't try to match their budgets.

"Once you know your targets, a strategy is easier to craft."

Return on investment

Return on investment (commonly referred to as ROI) is a calculation used to determine the effectiveness of a business strategy. In this case, it refers to the success of your marketing efforts. Calculating ROI also gives you a better understanding of how your campaigns impact your overall budget.

As you execute marketing campaigns, you need a concrete way to determine what worked and what did not. ROI compares the gains from a strategy or campaign to its costs in percent form, arming you with the data. This way, you'll know how to efficiently spend your money in future marketing efforts.

For instance, let's look at an example of how a t-shirt vendor might calculate the ROI from a pay-per-click advertising campaign on Google:

  • The PPC ad campaign costs $100

  • The vender sees a $200 increase in her sales while the PPC campaign is running

  • She therefore saw a 100 percent return on investment

Let's say she then undertakes an email marketing campaign that also costs $100. If her revenue increases by $150 as a result of that effort, the email campaign would have a 50 percent ROI. In the future, the t-shirt vendor would be wise to increase her spending on PPC advertising and place less emphasis on email marketing.

Marketing is rarely as straightforward as the above example, however. Many promotional efforts have positive effects that are less easy to quantify and that may create sales far down the road. Fortunately, significant improvements in marketing attribution can help merchants pinpoint the ROI of specific channels and campaigns more accurately than ever before. Not only can businesses calculate ROI based on year-over-year revenue gains, but they can also fine-tune those calculations to see which efforts are actually driving the conversions.

Content marketing such as social media or blog posts may not produce an immediate revenue bump, but rather build relationships with customers and set the stage for future revenue. When calculating ROI for these types of promotions, consider factors other than revenue, such as additional followers, page views, re-blogs and re-tweets. Returns-on-investment in the realm of ecommerce are about more than money — virality is one of the Internet's most prized currencies.

Pick the right marketing budget for your business

A marketing budget is a balancing act: spend too much and you'll break the bank, but spend too little and no one will know that your products exist. Setting a clear plan outline for the budget, whether it's based on fixed income or a percentage of revenue, makes it easier for you to allocate resources and measure the results of your campaigns. A mix of research, insights and a dash of data crunching will put you on the right track.

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