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4 Approaches to Marketing Budgets

Smart marketing managers should always be able to answer these questions if posed by a GM:

  • What would happen to return on investment [ROI] at the club if we doubled the marketing budget?
  • What would happen to ROI if we cut the budget in half?

The point of asking such question, of course, is to ensure that marketing and budgeting decisions are never divorced from each other. Marketing expenditures should be connected and evaluated based on the return on investment research indicates they will net.

ZERO-BASED APPROACH

The preferred approach for setting marketing budgets is zero based, meaning you start each year with a blank slate and build a budget around what is really needed. With zero-based budgeting, there are no slush funds that suddenly have to be spent at the end of a fiscal year. Of course, budgeting has to be flexible to permit this type of fluctuation in and between departments every year.

However, zero-based budgeting exists in a perfect world. In reality, many businesses use one of the following approaches.

Fixed percentage of revenue or overall budget

Some companies set marketing budgets as a fixed percentage of revenue or overall budget. While this makes budgeting easy, i.e. 10% of revenues or 3% of the overall budget, it isn’t really an approach that relates to the influence marketing could or should have on overall revenues. And, in good times perhaps less can be spent on marketing, while in bad times, more should be spent to bring in more business. Thus, having an inflexible formula doesn’t take into account changing circumstances—it just makes budget preparation easy.

Same level as competitors

This approach is based on the assumption that there is an “industry average” spend that works well for all players in a market. A major problem with this approach is that it fails to take into account significant differences between organizations, i.e. geographic location, population density, number of competitors, etc. It could also prevent a business with competitive advantages from increasing market share by spending more than average.

Residual

The residual approach, perhaps the worst of all, bases the marketing budget on what is left over once all other departments and expenditures are calculated. In so doing, there is no attempt to associate marketing objectives with what is possible or needed. In good years large amounts of money could be wasted; in bad years, the low advertising budget could guarantee a further low year for sales.

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