Marketing Budget Education
Need a quick refresher on creating a marketing budget, marketing budget amounts and and how our performance partnership model works? We’ve got you covered.
Are you worried about what your marketing budget should look like?
Do you have questions about creating a budget that will work for you?
Are you interested in performance pricing and want to know more about it?
Marketing budgets and whether to use performance pricing are essential factors for businesses. Coming up with the right numbers will also greatly impact your bottom line and can make or break a new business in its early years.
At Local Digital Buzz, we want to ensure that our customers have all the information they need to make the best decisions possible for their business.
Here is a quick look at some tips to create a good marketing budget and how you can use performance pricing to your advantage.
How To Calculate Your Marketing Budget
When creating a marketing budget, how much you spend depends on your revenue, how big your market is, and who your target audience is. Making a marketing budget can be a fairly large endeavor with many moving parts, but we will simplify it to get you started.
A marketing budget can be made by following these four tips:
- Research Your Industry
- Set Attainable and Clear Goals
- Factor In All Your Costs
- Analyze and Adjust Constantly
Now, let’s break each of these down so that you know how they work.
1. Research Your Industry
A good rule of thumb for B2B companies to live by is to make your marketing budget 2% to 5% of your total revenue. With B2C companies, you’ll need to spend between 5% and 10%. Research your competitors and see how much they are spending on marketing. This will help you to create a budget that is realistic and achievable.
2. Set Attainable and Clear Goals
Setting attainable goals is essential when creating a marketing budget because it allows you to allocate your resources efficiently. If your goal is to get 1,000 new customers in the next three months or if you aim to increase website traffic by 25%, you can plan marketing budgets and strategies accordingly.
However, if your goals are not specific or measurable, it will be difficult to determine whether or not your efforts are successful. Without specific goals, you may spend money on campaigns that don’t produce results.
3. Factor In All Your Costs
As we mentioned, marketing budgets will have a lot of components and moving parts. Some of the more important (but also fluid) parts will be your costs. Try to make the best guess you can when factoring in your costs, realizing that they may change along the way.
Here are some of the costs you need to consider:
- Website: The cost of your website (including the original design and launch plus monthly hosting fees and paying to keep the content fresh and up to date).
- Online Advertising: There are many variables for planning online advertising. Search engine advertising is an investment that usually runs a minimum of $1,000 per month. Online advertising is one of the more fluid costs that you’ll have to figure out and adjust as you go.
- E-newsletters: You’ll want to budget some money for keeping your customers up to date on what you are doing. This is a cost-effective way to market your business.
- Social Media: Ensure you budget money for online advertising on social media platforms like Facebook, Instagram, and LinkedIn. Remember that even if you have organic content, you have to pay to create it.
- Traditional Media: Digital advertising tends to be cheaper these days, but traditional advertising (radio, print, and TV) are still useful, depending on your business, so if you think they will be a part of your business, budget accordingly.
- Training: If you have a staff of marketing professionals, you’ll want to ensure that they (and any new people you hire) follow your company’s best practices.
- Video: Video is exploding in popularity and should be a part of your marketing strategy. Decide whether you want just to have a camera and some software or go for bigger productions.
4. Analyze and Adjust Constantly
Creating and adjusting a marketing budget is essential to ensure that your money is being put to good use. By regularly evaluating your web analytics, you can see which marketing efforts are working and which need to be tweaked or abandoned. This allows you to adjust your budget as needed to maximize your results.
Regularly reviewing your marketing budget also keeps you accountable for your spending goals. If you find that you are overspending in one area, you can make adjustments to compensate. Overall, creating and adjusting a marketing budget is essential in ensuring that your marketing efforts are effective and efficient.
Big Spenders vs Strict Economists
Industry analysts have formed a recommendation of 12% as an average for what companies should spend on marketing as a percentage of company revenues. Note that this figure has not changed for quite a few years. But it shows that there are big industries-spenders, and then there are economist-types who choose to spend less.
Check out the image and list below and see where your marketing budget as a percentage of your company revenue should fall.
Marketing Spending As a Percentage of Company Revenues (2018)
- Banking/Finance/Insurance: 4.3%
- Communications/Media: 11.0%
- Consumer Packaged Goods: 10.0%
- Consumer Services: 13.9%
- Education: 4.6%
- Energy: 0.5%
- Healthcare: 10.2%
- Manufacturing: 2.7%
- Mining/Construction: 0.6%
- Service Consulting: 6.2%
- Retail/Wholesale: 11.6%
- Tech/Software/Biotech: 12.2%
- Transportation: 11.2%
Marketing Spending As a Percentage of Company Revenues (2012)
- Consumer Packaged Goods: 24%
- Consumer Services: 15%
- Tech Software/Biotech: 15%
- Communications/Media: 13%
- Mining/Construction: 13%
- Service Consulting: 12%
- Education: 11%
- Healthcare/Pharmaceuticals: 10%
- Retail Wholesale: 10%
- Banking/Finance/Insurance: 8%
- Transportation: 8%
- Manufacturing: 8%
- Energy: 4%
As you can see from comparing the two graphs, in 2012, up to 4% of an energy sector’s budget was allocated for marketing, compared to 0.5% in 2018. The leader in marketing budget spending was the consumer goods packaging industry which spent almost a quarter of its total budget on its marketing! What did they spend only 6 years later: just 10%.
The big takeaway here is that companies engaging in consumer services allocate almost 14% of the budget for advertising. At the same time, 0.5% of the total annual budget is sufficient for businesses in energy and mining.
Some companies need to allocate more money to advertising and marketing than others. If you are in a customer service-oriented business, such as consumer services or retail, you will need a bigger marketing budget because you need to entice people to use your products.
However, if you are in a sector like mining and manufacturing, your business is not as dependent on persuading customers. Industries like these have products that sell themselves because they are necessary, or they rely on B2B, which needs less marketing.
In recent years these figures have changed significantly. And when they do, each industry, without exception, spends significantly less money on marketing.
The figures in the above chart are from 2018. Compare them to the figures below from 2012:
The big takeaway here is that companies engaging in consumer services allocate almost 14% of the budget for advertising. At the same time, 0.5% of the total annual budget is sufficient for businesses in energy and mining.
Some companies need to allocate more money to advertising and marketing than others. If you are in a customer service-oriented business, such as consumer services or retail, you will need a bigger marketing budget because you need to entice people to use your products.
However, if you are in a sector like mining and manufacturing, your business is not as dependent on persuading customers. Industries like these have products that sell themselves because they are necessary, or they rely on B2B, which needs less marketing.
In recent years these figures have changed significantly. And when they do, each industry, without exception, spends significantly less money on marketing.
The figures in the above chart are from 2018. Compare them to the figures below from 2012:
Marketing Spending As a Percentage of Company Revenues (2012)
- Consumer Packaged Goods: 24%
- Consumer Services: 15%
- Tech Software/Biotech: 15%
- Communications/Media: 13%
- Mining/Construction: 13%
- Service Consulting: 12%
- Education: 11%
- Healthcare/Pharmaceuticals: 10%
- Retail Wholesale: 10%
- Banking/Finance/Insurance: 8%
- Transportation: 8%
- Manufacturing: 8%
- Energy: 4%
As you can see from comparing the two graphs, in 2012, up to 4% of an energy sector’s budget was allocated for marketing, compared to 0.5% in 2018. The leader in marketing budget spending was the consumer goods packaging industry which spent almost a quarter of its total budget on its marketing! What did they spend only 6 years later: just 10%.
A Breakdown of Marketing Expenses By Industry
Let’s look at what percentage each aspect of your marketing budget should get, depending on if you sell B2B products, B2B services, B2C products, or B2C services.
Startups invest most of their money in increasing brand awareness, attracting the first audience, and creating prospects for scaling.
At the same time, an established business’s search for new customers and victory over a competitor is their main goals. Depending on what business you have and how established it is, here’s where you should budget your money to go:
B2B Products
- Direct expenses of marketing: 66%
- Social media: 50%
- Marketing employees: 51%
- Marketing research:45%
- Marketing training: 45%
- Marketing analytics: 48%
- Other overhead: 45%
B2B Services
- Direct expenses of marketing: 59%
- Social media: 49%
- Marketing employees: 51%
- Marketing research: 37%
- Marketing training: 26%
- Marketing analytics: 42%
- Other overhead: 38%
B2B Services
- Direct expenses of marketing: 57%
- Social media: 57%
- Marketing employees: 38%
- Marketing research: 47%
- Marketing training: 22%
- Marketing analytics: 47%
- Other overhead: 38%
B2B Products
- Direct expenses of marketing: 61%
- Social media: 55%
- Marketing employees: 42%
- Marketing research: 42%
- Marketing training: 25%
- Marketing analytics: 41%
- Other overhead: 41%
What Are the Different Payment Models for Marketing Agencies
If you’re in the marketing world, one of the essential elements of running a successful business is getting paid for the work you do. The more you get paid, the more and better work you can do.
Let’s look at how marketing agencies can get paid so you can get some money rolling in and grow your business.
Charging an Hourly Rate
Charging an hourly rate is one of the easiest ways for marketing agencies to get paid. This is because it allows them to bill the client for the time that was spent on the project. In addition, it can help to ensure that the client is not overcharged for the work that was done.
Pros
- A good way to ensure that an agency makes a profit on a project because the client is charged based on how many hours it takes to complete the project.
- Can be helpful when the scope of a project is still unclear or when you don’t know how big the project will be.
Cons
- The agency gains no benefit from working more efficiently.
- Not all billable hours are equal. For example, time spent on administrative tasks may not be worth the same as time spent on client work.
Pros
- Can be beneficial for the agency because it creates a steady income stream, even if it doesn’t land every client it pitches.
- Also beneficial for the client because they may get a lower price on their advertising since the agency is taking a commission.
Cons
- Can encourage agencies to focus on maximizing the amount of media in a project rather than on what is best for the client.
- Can lead to campaigns that are not as effective or efficient as they could be.
- Low media budgets can produce very small commission fees, which may not be enough to cover the costs of creating a campaign, which can be a major deterrent for agencies when they are considering working with smaller clients.
Commission-based Compensation
Commission-based pricing is a common way for marketing agencies to be paid for their services. It is a commission that the agency receives for referring a client to a particular media outlet. The commission usually ranges from 10-15% of the total media budget.
Commission-based Compensation
Commission-based pricing is a common way for marketing agencies to be paid for their services. It is a commission that the agency receives for referring a client to a particular media outlet. The commission usually ranges from 10-15% of the total media budget.
Pros
- Can be beneficial for the agency because it creates a steady income stream, even if it doesn’t land every client it pitches.
- Also beneficial for the client because they may get a lower price on their advertising since the agency is taking a commission.
Cons
- Can encourage agencies to focus on maximizing the amount of media in a project rather than on what is best for the client.
- Can lead to campaigns that are not as effective or efficient as they could be.
- Low media budgets can produce very small commission fees, which may not be enough to cover the costs of creating a campaign, which can be a major deterrent for agencies when they are considering working with smaller clients.
Retainer-Based Pricing
A retainer-based pricing model is a way for marketing agencies to ensure a certain level of income each month. It also helps agencies budget for their own expenses, as they know how much money they will have coming in each month. Retainers are typically based on a monthly fee, although some agencies may charge quarterly or yearly retainers.
Pros
- Popular among agencies because they allow for predictability in income
- Gives the agency a chance to develop a long-term relationship with the client.
- Can use retainer-based pricing as a way to attract new clients, as it shows that the agency is serious about its work and is willing to commit to helping the client achieve their marketing goals.
Cons
- One of the cons of retainer-based pricing for marketing agencies is that it can be less effective for clients who need to scale back their services.
- Can be less flexible for both the agency and the client. The agency may not be able to take on new work if it doesn’t fit within the parameters of the retainer agreement, and the client may not be able to change their mind about what they want once they’ve agreed to a retainer.
Pros
- Beneficial for both the agency and the client.
- For the agency, it ensures that they will make a profit on the campaign, even if it takes longer than expected to complete.
- For the client, it provides a fixed price for the campaign and eliminates any surprises associated with running an advertising campaign.
Cons
- If the campaign takes longer than expected to complete, the agency may run out of time and money to finish it.
- If the client decides they want to change or expand the scope of the campaign after it has started, the agency may not be able to accommodate their requests without incurring additional costs.
Fixed-Pricing or Project-Based Pricing
Fixed-priced or project-based pricing is a common model for marketing agencies. Under this model, the agency charges the client a fixed price for a specific advertising campaign. This includes all the costs necessary to complete the campaign and the agency’s profits.
Fixed-Pricing or Project-Based Pricing
Fixed-priced or project-based pricing is a common model for marketing agencies. Under this model, the agency charges the client a fixed price for a specific advertising campaign. This includes all the costs necessary to complete the campaign and the agency’s profits.
Pros
- Beneficial for both the agency and the client.
- For the agency, it ensures that they will make a profit on the campaign, even if it takes longer than expected to complete.
- For the client, it provides a fixed price for the campaign and eliminates any surprises associated with running an advertising campaign.
Cons
- If the campaign takes longer than expected to complete, the agency may run out of time and money to finish it.
- If the client decides they want to change or expand the scope of the campaign after it has started, the agency may not be able to accommodate their requests without incurring additional costs.
Value-Based Pricing
Value-based pricing is a system where an agency charges a client based on the value of the services that the agency provides. This value can be determined in a variety of ways, such as by measuring the results of the campaign or by looking at the client’s current marketing costs.
Pros
- Ensures that the agency is getting paid what its services are worth and that the client is getting the most value for its money.
- The agency is incentivized to do better work for the client.
Cons
- Riskier for agencies because it does not take high costs for poor sales results
- The time needed to achieve results may take longer than expected
Pros
- A hybrid model has the flexibility to meet everyone’s needs and get the intended results
- The two methods used are usually beneficial to both parties (one each)
Cons
- Since you are using more than one payment method, things can get complicated
For more information on pricing models, you can check out our leads and appointments page here.
Hybrid
A hybrid payment method for marketing agencies can be a combination of two or more methods, such as a commission-based model and a value-based pricing model. This allows for a balance between the needs of the client and the agency. For example, a commission-based model can help reduce the risk for the agency while a value-based pricing model ensures that the client gets the best possible deal.
Hybrid
A hybrid payment method for marketing agencies can be a combination of two or more methods, such as a commission-based model and a value-based pricing model. This allows for a balance between the needs of the client and the agency. For example, a commission-based model can help reduce the risk for the agency while a value-based pricing model ensures that the client gets the best possible deal.
Pros
- A hybrid model has the flexibility to meet everyone’s needs and get the intended results
- The two methods used are usually beneficial to both parties (one each)
Cons
- Since you are using more than one payment method, things can get complicated
For more information on pricing models, you can check out our leads and appointments page here.
How Performance Pricing Works
Performance-based pricing is a payment arrangement in which the seller is paid based on the actual performance of its product or service. It is becoming much more popular, as it incentivizes both the seller and the buyer to achieve better results.
In the advertising industry, for example, agencies had traditionally been paid 15% of the cost of the media they bought for a client. Now, more and more agency/client relationships are moving to performance-based pricing — they are paid based on achieving certain client advertising and/or marketing goals. This can be a win-win situation for both parties involved, as it often leads to increased efficiency and better outcomes.
The Benefits of Performance Pricing
Performance-based pricing is beneficial for several reasons:
First, it often leads to an alignment between the buyer’s and the seller’s goals. This is because performance-based pricing incentivizes the seller to meet or exceed the buyer’s expectations.
Second, it provides a measure of insurance for the seller. This is because it guarantees that the seller will be paid more when they provide more value to the buyer.
Finally, performance-based pricing can be extremely useful in highly uncertain situations where both parties must make complex trade-offs among conflicting objectives. By precisely presenting their objectives and issues, each party can better understand the other and reach an agreement that benefits both sides.
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B2B/B2C lead generation that sees your business through
We’d love to tell you this is all you need to know about a marketing budget and performance pricing, but there’s a little more to it than that. But don’t worry, at Local Digital Buzz, we can teach you everything you want to know.
Local Digital Buzz has a whole team of marketing professionals who can explain all of this information and more in greater detail with the aid of our proprietary software. Click the link below to book a demo with Local Digital Buzz, and you can further your marketing budget education.