November 6, 2018 - Episode 12

Marketing Budget Tips for Small Businesses

Having a budget and understanding how marketing fits within that budget is not a glamorous topic, but it’s one that every business owner needs to think about. Knowing how much money needs to be dedicated to marketing is a critical aspect of business. We discuss how marketing fits within a business budget and what the ideal marketing budget is. We’ll also explore some other marketing budget pitfalls to avoid and tips to take advantage of.

Episode Transcript

Jake Braun:
Welcome to Kickin it with Kapok, podcast about business owners, marketing struggles and solutions, and other business-related topics. I'm Jake.
Mirela Setkic:
And I'm Mirela.
Jake Braun:
This is Episode 12, marketing budget tips for small businesses. Today, Mirela and I will be talking about why budgets are important for small businesses, how marketing fits within a business budget, what the ideal marketing budget is, and some other tips. Let's start with the basics. What is a budget in terms of a small business? Is this like a budget I would have for my house, or is this something slightly different than that?
Mirela Setkic:
It is a little bit like your personal budget that you might have a home, but it's also a lot more complicated, and a lot more layered, and you can think of a business budget as a financial plan for the future. It both focuses on the financial aspect of your business, which is the money side, and also the operational side of the business, which are your goals for the upcoming year. With your business budget, you're pretty much sitting down with your team of people, or maybe sometimes it's by yourself if you are a person of one or a small business, and you are asking yourself, "How much money do I expect to make for the upcoming year, and how much of that money should I, or can I spend on different aspects of running my business?" One of those aspects is marketing, and another aspect is buying a new desk, or whatever the case is, but pretty much thinking about how much can I spend based on how much I expect to make.
Jake Braun:
Yeah. I definitely agree with one of the first things that you said. You definitely need to have goals if you're running a business, and how I look at it in terms of versus a personal budget is, with your personal budget, you're mostly focused on, I know I have X amount of income for this month or this year. Let me make sure that my expenses, or the stuff I spend money on as a person, doesn't exceed that, and maybe I'm even trying to sock away a little bit of money for savings, or retirement, or whatever large purchases in the future. With a business, your revenues are more fluid. Hopefully you're growing, and hopefully they're increasing on a month to month basis, and then you need to be kind of projecting how your expenses are going to line up in the future as your revenues are hopefully increasing, or if they're decreasing, you also need to be considering, how am I going to be ramping down my expenses, or am I going to get a loan, or what am I going to do in that situation?
Jake Braun:
Let's talk a little bit more about maybe some of the reasons that someone might use a business budget. Maybe you can go into that a little bit.
Mirela Setkic:
Yeah, I can definitely do that. I think most people think about budgets, and they kind of get a very uncomfortable feeling. It's like, oh, my god. I'm going to have to do a whole bunch of math. I'm going to have to take out that big calculator from my desk, and stuff is about to get real here. Really, budgets don't always have to be that terrible. Doing a budget is really a company's opportunity to set goals for the future, and kind of get everyone on their team, especially people who are on higher positions, and are decision makers, to actually get on the same page, and also motivate the rest of the people in the company, and get them excited about the company's goals, and also decide what type of improvements need to be made within the company to maybe ... If you decide that maybe you need to spend less this year, then what do you need to do to become more efficient, and also, how are you going to track your performance, and how are you going to grade yourself, and your company at the end of the year to decide if you've done a good job or not?
Jake Braun:
It's funny you say about the math. We run into a lot of business owners that find math, I don't know, scary. I love math, so I can't necessarily relate so much with that, but it does seem to be a sticking point there.
Mirela Setkic:
I know. I sort of love math, so I kind of understand, so I appreciate the beautiful magic of math, but man, I do have a pretty large calculator, so I understand.
Jake Braun:
Math can make stuff happen. Maybe we should elaborate more on maybe how those reasons turn into benefits for business?
Mirela Setkic:
The way that I look at it, and this might be kind of a simpleton way to look at it, but pretty much your budget allows you to answer the big questions that you should be asking as a company, and some of those questions are, and this is a big one is, should I spend more or less on marketing? That really depends on how much do you expect to make? Also, should I increase or decrease my expenses? Maybe you want to buy the beautiful desk that costs $2,000. The question is, can you afford it, and the answer is in your budget. Also, this is also a huge one, and that is should you hire more people? That's also in your budget. Also, do you need more equipment? Should you, can you afford to buy new equipment, or should you buy used equipment? What can you afford, and also you might do a budget, and you might realize that you're a little bit wasteful, and maybe you spent money on some things that you shouldn't have spent on because maybe it wasn't a good idea. It didn't pay off, so this is your opportunity to say, we need to cut that, and then we need to kind of become more efficient in that area.
Jake Braun:
Okay. I think we've outlined what a budget is. Now maybe we should talk about how marketing fits into that budget, and what sort of things fall into the marketing category within the budget.
Mirela Setkic:
I guess you can think of the business budget as a big apple pie, and it has, I don't know how many slices there are in the pie, but one of those slices is your marketing budget. What you're really doing is when you're setting your general business budget, you're saying, "This is my budget," and you are also deciding how much of that budget you should be spending on marketing. It's kind of ... It feeds your marketing. If you don't allocate any money to your marketing, then it's not going to survive. It's going to starve, and what we have noticed is that most businesses, especially with your smaller and your just starting out, they're so focused on, oh, I just want to grow. I want to become big. I just want to do all these things, and then we ask them, "Okay, well, that's great. That's beautiful. We want to help you. How much money do you have allocated to that?" They're like, well, I don't really know. Do you have a website? I kind of have a website, but it's not that great.
How are you going to communicate this offer that you have with your audience? Oh, well, I don't know, so some of the things that are in the marketing budget, which are your website, the software that you're going to use, the email marketing, analytics, the customer relationship management, all of those things cost money, and that money comes from your general budget.
Jake Braun:
The other thing I would add is strategy. All those things are really great, but if you haven't come up with a marketing strategy, you need to either spend some time, or money, or maybe both on developing a good marketing strategy, and one of the other hardest parts is really in that first year, when you have a new product or a new whole company. Your budget is going to be a lot of research, a lot of intuition, a lot of educated guess work, just doing the research and finding out what the industry is like, how it's going to respond to a product or service like you're introducing. Then once you do have an established business after a year or two, you start to get more information under your belt. You might have financial statements from previous years that you can look at, and see how you're performing, and maybe also look at the industry in general, but the more years of data you gather, you can start to detect trends, and business cycles. You might realize that Q4 is when your retail business is doing great. Hopefully you realize that in year one, when you're doing your research, and your guesswork, if you will.
This is also a time that's slightly dangerous, because you might start to think that you know all of this stuff, and you might rely too much on your financial data, and just think, oh, I'm going to continue increasing at 3% like I did last year, and I'm just going to scale up my expenses with that. That's the danger, because that's when the market changes can happen, or the shifts, and the patterns that you've found, they no longer hold true, and you're stuck in that point, because you hadn't done the research. You didn't think about, what am I going to do if this happens, or if I get into this situation where things aren't working like I thought that they would? You need to always try to stay ahead of the curve with both your strategy and your budget. Now maybe we should talk a little bit more about what that ideal marketing budget is. How do you decide how much to spend on marketing in general for your company, and how do you decide how to allocate the money amongst the different components of marketing?
Mirela Setkic:
Oh. Now we're asking million or billion dollar questions here, and those questions are very tough, especially if you are just starting out, and you don't have any past data to look at. You don't have a lot of money to spend, so you feel the pressure to find that sure thing that is going to make you the most money, and this kind of reminds me of a recent episode that we did with Dale Baker from J.T. Eaton. His company has been around since 1942, I think, and even today, they struggle to allocate marketing money for a product that they're just launching. He has to go to his CFO, and pretty much try really hard to convince him to even get a little bit of money, and I think he said what they usually end up doing, which happens to be common for most businesses, is just taking a certain percentage of projected sales of their product, and allocating to marketing for that specific product or service. I think ... I was doing a little bit of research for this. The most common approach for most businesses is to take between three and 5% of their gross revenue, which is also known as a top down approach, and dedicate that money to marketing.
Which is not the ideal way to do it. I think the marketing doctor would prescribe that if you are a new business, you should spend between 12 and 20% of your gross revenue on marketing, and then if you are a company that's been around for a couple years or a few years and you consider yourself to be established, then you should spend between six and 12% of your gross revenue. Essentially if you want to make money, you have to spend money. It's as simple as that.
Jake Braun:
That's also true. I think one of the biggest things that I would add is that some people out there think of marketing as just a peer expense. There's no reward. They're trying to drive their marketing percentage down as low as they can, and they kind of compare it almost to a cost of goods for a product that they're selling. In that scenario, you're trying to drive down the cost to get the product that you're going to sell to the lowest price possible. It seems like it's always good to drive that price down, as long as you're not diminishing the quality of your product. That's a positive for the business. With marketing, there's sometimes not that thing to balance it. People aren't seeing the benefits of marketing as directly, so they think, I'm just going to drive the price. It's just a peer expense. Just drive it down as low as it can go, and they're sometimes not thinking about the benefits at the same time that they're thinking that marketing dollars are just expenses. You also need to consider what your competition is doing.
If you're going to be spending 5% on an existing product, but maybe your competition is going to start a marketing blitz, and they're starting to spend 10 or 15%, you might need to reconsider, especially if you have a large profit margin on that product, because the competitor might take over part of your market share then. You might lose out if you just stick to whatever number you've decided, and the same is true if a new competitor is entering your market. You might want to spend more money to stop them from getting a foothold in the market that you're in. You would be shortsighted to just stick with that percentage, and let that competitor grow, if you think you have an opportunity to really spend a bunch of money on marketing while they're trying to enter the industry to pretty much block them from coming in and competing with you. Spend the money now, and you won't have to spend it later, or you won't have to spend as much money later. I think the next thing we should probably talk about is the pitfalls, the marketing pitfalls.
Jake Braun:
What are some of those that businesses need to avoid, to not waste money on marketing? We talked a lot about why they should spend money on marketing, but what are the things they should avoid?
Mirela Setkic:
All right, so where should we begin? I guess I'll start with some of the most common mistakes that we have seen businesses here in the Tampa Bay area make, and one that really comes to the top of my mind is being too conservative, and playing it way too safe. Just kind of dipping your toe just a little bit in the marketing pond, just to see how things are there, and then just saying, "Okay, well, I tried it, and I didn't get a lot out of this, so I'm just going to not do this anymore." While this feels very safe, and you feel very in control, it's also very dangerous because it could be a missed opportunity, and it could give you skewed results because your sample size is so small, you haven't spent enough money, and you have made a decision that's going to have a long lasting impact on your business. In reality, you should have just spent a little bit more, stayed a little bit longer, and you probably would have seen different results.
The other mistake that a lot of businesses do is that they just start throwing money at things that feel or look like a good idea. I know someone who did this beautiful commercial, and it's the thing that I need to do, and I'm just going to do it. You need to figure out, why are you doing it, and what do you hope to accomplish from it? What do people usually get from TV commercials, and once you have those realistic expectations, then you can decide if it worked or not. The other thing that's very, very common is people just do a little bit of everything at a time. There's no consistency. They will take out a single ad in the local paper, and say, "Well, this ad better make it rain for me." They didn't do anything. Therefore all print advertising is a waste of my time, and in reality, with things like that, it's a way more long-term process, where you kind of have to be in it to win it. You have to maybe do 12 months of print ads, so maybe that publication's readers, reader base needs to get more familiar with your ad.
Maybe you need to earn their trust and eventually they will start trickling in. If you just do a single ad, you're kind of a one hit wonder, and well, you know how we feel about those. Also, another thing that we have seen is people just not tracking or reviewing their results. They just put a whole bunch of stuff out there into the universe, and kind of see what kind of vibes or feels they get from it, and then they just decide based on that. In reality, they don't really know if it worked because, well, they didn't track it so it's kind of like a gut feeling. Just track everything, and kind of be in it to win it a lot more.
Jake Braun:
Yeah, and I would just add a few things there. First on the playing it too safe point, if our listeners have listened to our episode one on strategic risk, or if they haven't, now would be a good time to go listen to that episode, we talk about some of the misconceptions about playing it safe. Running a business is a strategic endeavor, and you have to take strategic risks. You just need to understand what risks you're taking, and what the opportunity costs are. What exactly the situation you're in involves, and not thinking of safe as like safe walking down the street. You have to think about it from a bigger perspective, and about how it's going to play out over a longer period of time. I would also say, you mentioned sample size. That's where that math comes in. You've got to know about the statistics.
Mirela Setkic:
I know, the magical math. I do actually like statistics. I just don't like calculus.
Jake Braun:
I'm a fan of both statistics and calculus. A couple other things I would mention here in this section, though, you mentioned doing lots of little things just a little bit. You've got to go all the way in. I would like to talk a little bit about maybe how we do our choices, or how we make our choices on marketing. We run a lot of different campaigns, try a lot of different things, and basically see what works, and then try and spend more money on those things, and the things that don't work, you just shut them down. You just have to allocate a certain amount of money or a certain amount of time to something to make sure that you know for sure that it will work or that it doesn't work. The things that you allocate more money to, maybe look for even more opportunities that are similar to that opportunity, and try and identify patterns of things that work and things that don't work using that tracking data that you did do for all the different things that you are doing. I think that's enough on pitfalls. Maybe we should talk now about how you can maximize your marketing budget.
Once you do have that budget, you obviously need to regularly review it. Otherwise you just wasted a bunch of time creating a budget that you're not even looking at, so how often should a small business do that?
Mirela Setkic:
That's a very good question, and I think that I should start channeling the marketing doctor again. I think the marketing doctor would recommend that you review your budget quarterly and annually. Maybe have many reviews every quarter, just to kind of see how things are going, just to make sure that stuff is not totally going sideways, and then annually, just to look at the big picture, and see how things went, and what you should do more of, and what you should do less of. The other important aspect of budgeting and maximizing your budget is going in every single month, and adding your actual numbers to your budget so you can see how closely those are mimicking your projected numbers, so you can see how good you are at projecting your budgets, and budgeting in general. You can kind of decide if you are too conservative, or maybe you are just a little bit too optimistic, and you need to dial it back a little bit for your next budgetary planning. Just kind of keeping an eye on everything, and being realistic.
Jake Braun:
That sounds spot on to me, so what about making a deviation from the budget? If you all of a sudden think you've found this great new opportunity that wasn't budgeted for, or just whatever a business owner might come up with that's not in the budget, that they want to make a spur of the moment decision on, and start spending more money on something. Is that a good idea, or should you not do that?
Mirela Setkic:
Unless your deviation is based on something that you discovered in your most recent budget review, then you should not deviate. Deviation is the devil. If it's not supported by something that you learn from your budget review, and if you are just kind of ignoring your budget, and just going out there, and doing side things, then you probably wasted your time putting the budget together in the first place. It's kind of ... I was just thinking, it's kind of like when you decide, okay, I'm really going to get in shape. I'm going to lose some weight, and then 60 days from now, or whatever the plan is, I'm going to go weigh myself in, and then you decide, well, you know what? I'm just going to do whatever, and I'm just going to do that weigh in in 60 days, and that 60 days comes. You weight yourself, and you realize that you have actually gained 20 pounds. That probably happened because you didn't follow your dietary budget. You just kind of winged it, and stuff didn't work out.
Jake Braun:
I think that's a perfect analogy. That's probably exactly what a business could expect if they constantly make deviations from their budget. I think the biggest thing is having a reason, and having a reason that you could sell Morales' proverbial marketing doctor on. What about, should your budget be supported by a plan of some sort, then?
Mirela Setkic:
Yes. It should be, and I was reading somewhere on the interwebs, and it said that 85% of small to medium sized businesses operate on a budget without a marketing plan, so they just kind of go in, and they're like, well, this is how much money we have. This is how much we're going to spend on this and that, but they never answered the why. Why are we spending the money? What is our goal? What do we plan to accomplish? Instead, they're just kind of throwing things out there, and hoping that something is going to stick.
Jake Braun:
All right. Yeah. I think we're getting close on time here, but we should probably do an entire maybe separate episode on business plans and strategy, because they definitely are important, and you should have a plan of some sort. Is there anything else that we should mention before we close out the episode?
Mirela Setkic:
Since Jake loves math, and especially statistics and calculus, and since I'm a dumb dumb when it comes to calculus, I don't know if calculus has anything to do with budgets, but Jake would be happy, and I will help, too, to actually help anyone out there who needs help with their budget. Review your budget, and kind of point you in the right direction, just to kind of tell you where you should start, especially if you're just starting out, and you don't have any past data that you can use to budget for future. You're kind of new in the industry, and you just need someone to help, and someone who's really good with math. Then we are your people, and when I say we, I mean Jake.
Jake Braun:
Yeah, definitely get in touch with us. I'm not sure if I'm going to be able to work any differential equations into your budget, but I'll give it a try. If you are enjoying the podcast, make sure you subscribe and rate or review us wherever you listen to your podcasts. We really would appreciate it. It really would help us. That's how new listeners find us. That's how the podcast keeps going, so we would definitely appreciate that. With that being said, I think it's been a great 12th episode. Feel free to reach out to us if you have any questions or comments about anything we talked about today, or marketing in general. You can visit us on our website, KickinItWithKapok.com, or on social media. We're on Facebook, Instagram and Twitter as Kapok Marketing. This has been Kickin' it with Kapok, brought to you by Kapok Marketing. Thanks for listening. We'll have something just as great for you next time.