0369: Working Out An Effective Marketing Budget For Your Service-Based Company

This Podcast Is Episode Number 0369, And It's About Working Out An Effective Marketing Budget For Your Service-Based Company “How much should I spend on marketing?” Most construction business people ask me this question at some stage. Many small company owners find working out how much to spend on marketing a tricky exercise to calculate.    Generally, there are five ways to work out a marketing budget for the year. Remember that these are marketing budgets, not advertising budgets. Marketing covers everything you do in your business that creates awareness, including such activities as advertising, brochures, competitions, trade shows, demonstrations, travel, direct mail, email campaigns, your website, and sponsorship.  

1, No idea at all method

Some service-based businesses don’t have any budgets. They just advertise either when they feel that sales have slipped that they need an extra project, or when they get duped into advertising by some advertising salesperson (“Buy now, and we will give you 50% extra free!”). Ever wondered why they offer you the freebies? Usually, because it’s such a dumb time to advertise that all their regular clients are holding back and the sales rep is desperate.    I see many construction businesses that are just too busy during certain times of the year to think of advertising, and if they did, it would be a waste as they would not be able to handle the work anyway. Suddenly, however, sales fall (perhaps due to seasonality), and then the business starts marketing. However, this could be a waste of money as often you’re marketing at the wrong time, or advertising to get instant sales, which is unlikely to happen. So the problem is that the marketing money is spent during slow times (this hurts) and that it is allocated to fix a problem instead of creating new opportunities.

2. Whatever you can afford method

Here you spend spare cash (yes, spare cash may exist!) on marketing. So the marketing is dependent on cash flow. During the good times, you market more, during the bad times you cut the marketing. The danger here is that if the construction business falls, and you cut marketing, then the situation is likely to spiral out of control. How can you climb out of the situation when there is no money for marketing?

3. The percentage of sales method

This is a popular method. Typically, you work out at the start of the year what percentage of sales you want to spend on marketing. For example, if sales last year were $200,000 and you decided to spend 5% of sales on marketing, then you’d have a budget of $10,000 ($200,000 x 5%).

The problem with this method is that you may not need $10,000 worth of marketing to achieve your sales target. What if you can only do so much? If $4,000 spent on marketing creates enough work for you to be flat out, then the other $6,000 is just being wasted. And what percentage should you use?

4. The 'whatever the competition is doing' method

This is the cheat’s way. Find out what the competition is doing and then spend a similar amount on similar promotions. This approach has an obvious problem: what if the competition has been using method number one—the ‘no idea’ method? For example, a well-known plumber went into receivership after spending large amounts of money on radio advertising. Now, if you had copied that business, you might have found yourself down the gurgles as well.   Never think that the competition or the more substantial companies to know what they are doing, as often they do not. I know of many large construction companies that spend thousands of dollars on wasted promotions. Just watch TV adverts every night to spot the ads that represent a waste of money. Then again, copying the competition is a poor strategy. It would be best if you always strive to be one jump ahead of the opposition.

5. The objective and task method

Now, this is the one I recommend. At the start of the year, select the targets you’ll be aiming at over the next 12 months. Work out what you want from each of these targets (such as 100 new clients, or each existing customer to spend another $100, or an increase in the average sale). Then specifically state what you want to do to achieve this, estimating how much it will cost (common sense will give you guidelines, for example, a small service-based business will not be spending $100,000 on TV advertising).

Complete this exercise for each of your targets, then add up all the costs, and this will be your marketing budget for the year. Points to note include: 

Always have a cash reserve for marketing, so you can take advantage of any opportunities that may arise during the year. Remember, not only can you not predict what may happen (for example, some action by your competitors), but the whole point of being in a small business has the flexibility to adapt to market forces. Your objectives must be specific so that when you’ve reached them, you can choose to stop any further marketing expenditure if you wish to remove any wastage. Of course, you could continue and look for more growth. The point is, you—not someone else—make that conscious decision to spend your whole budget.  Conduct a break-even analysis. For example, if you’re spending $1,000 to get 50 new customers to pay, on average, $50, then sales will be $2,500. Will $2,500 in sales generate enough profit to cover the $1,000 spent on marketing?  You may have several methods that you have used in the past, which you know work. Fine, include them in your plan.  You may have to spend a certain amount of money to keep your existing clients and maintain market share - make sure this is in your program, and you review the effectiveness of what you’ve always done.

Remember to monitor results

Finally, always have a method of monitoring if your marketing is working or not—otherwise, you’ll fall into the ‘no idea’ category that far too many small business owners belong to. You can’t refine and improve your marketing spend unless you measure the results

About The Author:

Sharie DeHart, QPA is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on how to manage the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com