The last step in the expected results part of the marketing plan which is actually defining the budget. The budget has probably already been defined in different parts of the marketing plan. Because we’ve been proposing actions and different elements of the marketing of course are going to have cost. So here’s where we put a figure, where we say this is exactly the marketing budget that we’re going to use for this marketing plan.
Marketing budget is an estimated amount of cost that will be required to promote products or services. Marketing budget is generally part of the marketing plan. And of course, is a very important part of the marketing process. The budget should include basically, all the expenditures and investments that we are proposing in the marketing plan. So basically, we take them all and we end up having a figure which is the total marketing budget. How important is the budget in the marketing plan? Well just out of common sense probably you can anticipate that this is going to be very relevant. Depending on the budget that we have, or depending on the budget that we’re given we can do some things or others. So basically the budget is going to define probably many of the things that we can do or we cannot do.
So one of the big questions in a marketing plan is how to define the marketing budget. How much money, how much do we need in order to build the marketing plan? Basically, this question is one of the big dilemmas in the marketing plan. So let me try and bring you here basically four different ways of 4 different methods to define the marketing plan budget.
One is a very simple one, what is the affordable method? The affordable money that we will have ready for the marketing plan is going to be the first method.
Second one is using a percentage of sales. As we’re going to see this is a very common method and it’s interesting and very common actually.
I know there’s way of doing this is the competitive parity method, basically we look at the competitor and we’re trying to do something like them.
And the last one, probably the most interesting and I think the one I recommend is the objective and task method to define the marketing budget.
So let me review these four methods and then finally, we’ll try and summarize what we can learn from the marketing budget.
So basically the idea of the affordable method is basically as the first one, is defining the marketing budget based on what the marketing manager on the top management things or besides is what we can afford. So basically this is the monitor you have. What is the problem of this method? Well I don’t think this is even a method. It’s basically, because it lacks any consideration for the marketing objectives that you’re trying to pursue. So basically, we are just using the money that we have left and that’s it. Usually companies that use this affordable approach basically look at how much money they have to spend in operation cost and other budgets. And then the money that is left is going to be given to the marketing budget. What is the disadvantage of this approach? Well basically the market is going to be the last thing, the bottom of the prism priority. So basically this does not say many good things about the marketing function in this company. And probably with little resources, probably your expected result should be also quite low.
Second method, very common. Percentage of sales. The percentage of sales method is basically a way of defining the marketing budget. Basically using a percentage of the spected sets. So let us say for example 5% of my sales are going to be dedicated to advertising or to marketing next year. What is the advantage of this? Well it’s simple. So basically we anticipate sales, a way to find a fixed percentage of sales as a marketing budget. It’s very common, it’s used in many industries. So what would be the criteria for this signing up percentage? 3%, 5%, 10%, how much? Let me give you some criteria. First, as an industry benchmark, so consider your industry and see how much they’re investing. I don’t know, for example in the hotel industry which I know well, could be 3%, they’ll wait for you. Then is the question of considering new versus existing products. If it’s a new product probably is going to require more, if it’s a existing product less. Another thing is the brand awareness level. So is the brand well known? Maybe we can manage with less. Is it not so known? Well probably we are going to need more. And the other thing is the volume of sales, if it is a company that is selling a lot usually the percentage is lower. For example, Walmart will probably spend 0.4% of its sales in advertising, and they do big advertising campaigns. But it’s a little percentage because it’s a big volume of sales.
Next method, the competitive parity method. What is this? Well simply we look at the competition and say, we’re going to do what they do. So they competitive parity method is a way to define a marketing budget based on what the competition is actually investing in marketing. Is this a very scientific or successful method. Probably no, why? Because you’re relying to compare making your decision. So basically you have to copy whatever they do. So probably not the best one, not the best method I would say.
What you can see probably the most interesting method. The last one which is called the objective and task method. What is idea? The idea that basically in this method, we were going to try and define and what are the results that we want to achieve? What are the objectives that we want to achieve. Second thing, what are the strategies and tactics that we need to achieve that objective? So what are the marketing mix elements, the actions that we’re going to use? And third, how much will it cost? So we say if this is objective, this is the tactic that we use, and this is the cost of the tactic, that’s the budget I need. What is the advantage of this? Well that you do things probably the right way which is finding the objective for the brand. And then finding the methods that you are going to use or the marketing tools that you are going to use, and then just sign the money to pay for them.
So probably the advantage of this is that is probably more common sense basically, and this link in actually your budget to the final objective that you’re trying to reach. So I would say that’s probably they want to recommend. Is this the only way of doing this? Of course no, but it’s probably a sensible recommendation.
So let me do a quick summary on wrap up. The budget is basically what we’ll include all of the cost of other resources that we’re going to use. So we take them all on, we’ll include them there on this figure which is the total budget. There are four ways of actually finding the budget. The first one is basically what ever is availale. So basically a very simple way, the second one is a percentage of sales, interesting. The first one is company fire routine looking at the comparison in doing what they do. Under the fourth one is the one that I think is more sensible, which is basically objective and task. And that will be probably what I will recommend.
So this we finish with the budget definition and let me remind you that in your assessment you have to define your own budget. So try and have an idea what going to be your marketing budget and actually try and justify your budget using one of the methods that we recommended here.