On trains of yesteryear, the most fun part of the train was always the caboose. Practically speaking, it meant you got to drive ahead to reach your destination. But also, who doesn’t love the visual of a red caboose? They’re way more fun than all those coal cars in between. But when you’re setting your marketing budget, that’s not where it should be.
The caboose, the tail-end Charlie, the dregs of the coffee… you name it, that’s where too many entrepreneurs drop their marketing dollars. “Let’s see, I must have product production (engine), and legal services (first car), can’t do without those… and I need insurance (third car), and an office (fourth car), and and and…. uh oh. I have just a small X amount to put into my marketing caboose. Well, we’ll have to live with it, what can we do?”
Here’s the deal: to sell your product or service, you need customers. And to get customers, bare minimum they need to 1) know about it and 2) be able to acquire it. That requires taking out advertising to let people know you exist, and to some extent you can blunder through this without good agency help (and with improved performance as you learn!).
To do more than the bare minimum, with the help of a good agency, you develop a branded product or service, so now consumers 1) know about the brand, 2) desire/lust after the brand, and then 3) acquire the brand as soon as possible and pay at least a small premium for it. Having a desirable brand with a functional level of media dollars is what pulls your product forward.
Marketing, my friends, is the train’s engine, not its caboose. Set your marketing budget accordingly, at the head of the train.
Leaving all metaphors behind for a moment, let’s talk about what your budget should be. The SBA (Small Business Administration) says that companies with sales under $5 million typically require a marketing investment of 7 to 8% of gross sales, higher for products in certain categories such as cosmetics or fashion. We find those figures to be exceedingly spot-on. So, one million in sales needs a budget of $70k to $80k to keep moving forward (upward) at a decent pace. Can’t afford that? Then you need to charge more or reduce your costs elsewhere. Otherwise, your growth will be stunted to the level that you have failed to feed your
What if you’re a startup? Eight percent of zero is zero, after all. To set your marketing budget, we advise plotting your planned growth based on size of market, estimated market penetration at product maturity, difficulty of market persuasion, and entering that data on a year-over-year graph. Then, figure out what your marketing percentage looks like with projected sales in year 2, year 5, and so on. From there you should have a pretty clear picture of how much you should invest in marketing, based on how fast you want to grow and how much risk you’re willing to take. Plan for that percentage in your pricing, and until you reach a tipping point of growing sales intersecting with tailing-off startup costs (website buildout, legal fees, etc), you will be investing in future success (i.e. get used to red ink).
“Yes, but…” you say. Yes, of course there are outliers who get lucky by becoming the fad of the moment, and certainly your local garage owned by a mechanic with deep roots in the community can get by launching his business with very little invested into classical marketing, but most of you fall into the normal category. And that means putting your marketing investment at the head of the train.
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