by Tony Fannin, President, BE Branded
I recently gave a talk about marketing principles to a group of successful CEO’s and entrepreneurs. One of the points was “How much to invest in marketing when developing a budget.” Setting marketing budgets is more art than science. It’s about predicting the future and what it would take to get you to that future. The only thing you’re sure of is how much capital you have on hand.
Most Fortune 500 companies typically spend about 5 – 7% of expected gross revenues. The key word is “expected”. (If you invest the same amount that you did last year, expect about the same level of revenue.) They too, must predict and take calculated chances. Nothing is guaranteed. If you are introducing a new line, a new service, or a revamped brand position, it takes about an additional 12 – 15% in marketing investment. This is on top of your baseline of 5 – 7%. If you take away from your base to contribute to your new product launch, all you’re doing is robbing from Peter to pay Paul. You end up hurting your overall brand to benefit of a specific product and, in the end, not really gain much toward your overall objective.
The question of how much to spend depends on your brand power and position in the category you compete in. A brief overview:
Elite brands – They are icons within the category. They invest substantially into marketing which contributes to their marketspace position. This group gets the most bang for the buck because every dollar they spend is in solidifying their position and brand. They don’t have to spend money on “catch-up” marketing (marketing to close the gap or catch up with a leading competitor) since they are really competing against themselves.
Above average brands – They have significant power, but must invest in marketing heavily just to keep their market position because of the downward pressure of the Elite brands. This group must invest even more if they want to make any gains on the category leaders.
Below average brands – This group has nothing to lose. They are either new brands or a brand that have been neglected. A small investment in marketing makes a big difference because they don’t have anywhere to go but up. They exert pressure up and force everyone above them to adjust their marketing budget because they are trying to advance and applying pressure from below.
Average brands – This is the most vulnerable group. They are neither gaining or declining. They are literally in the middle of the road. As with most things in the middle of the road, they are roadkill. They feel the squeeze from Above Average brands pushing down on them and Below Average brands exerting upward pressure trying to increase their position. Eventually they become irrelevant or disappear all together.
Knowing where you are in brand power will help determine how much marketing investment that will help you achieve your goals. During the talk, a comment came up that a successful entrepreneur said he has only spent 1% of gross revenues and have opened two new locations. To him, this was contradictory to the 5 – 7%. After further discussion, here is what was discovered:
• His company is less than 3 years old, so almost any amount invested would help greatly. (Below average brand)
• Still invested in mass media (radio) to help, successfully, spread the word and got clients.
• Most importantly, his vision was local.
On the last point, here’s an important thing to keep in mind. If you are wanting only 2 locations in the town you live in, it really doesn’t take that much to keep those two stores profitable and successful. You invest in marketing as needed since you’re really competing against Below Average and Average brands. If your vision is to have 300 stores across the U.S, then you’ll be competing against the Elite and Above Average brands. This dictates you’re going to have to, at minimum, match their marketing efforts and find ways to go above and beyond to make any gains.
As you see, setting the right marketing budget is not as clear as accounting likes to try to make it. You must take into consideration your goals and what’s it realistically going to take to reach them and your competitors (above and below you) and what their efforts are. You can bet, the ones you are competing against aren’t standing still. If you see competitors pass you by, you may be the one in the middle of the road.