The Marketing Slice Formula – Showing you how to Calculate your Marketing Budget in 2023
- Read Time: 7 Minutes
- Updated: 16th of February, 2023
Introduction
This blog will help you calculate your marketing budget
The Marketing Slice Formula: ((Business Transaction + Industry) / 2) x your Gross Revenue = Marketing Budget
What is a Marketing Budget?
Before we can show you the formula we first need to define a few things and we should start with the word ‘Marketing Budget’.
In simple terms, the marketing budget is a percentage of your gross revenue that is invested back into your marketing department.
Your marketing budget refers to all costs that are allocated to marketing, advertising, public relations, promotions, and anything else you might blanket under that very wide-cast net called ‘marketing’.
Marketing Budget, defined by Billy A James
To work out what the percentage should be, we should address the two contributing factors that make up the allocated percentage amount of our marketing budget. We consider these factors to be what type of Business Transaction your business sells and whether you’re new to the Industry or well established. We’ve noticed that most businesses only use one or the other of these two factors, however, we believe both of these variables play an essential part in your budget creation, and below we’ll show you why these should be considered together.
The two defining factors that contribute to your marketing budget.
Business Transaction
Is what sector your business is tailored to sell to the Business 2 Business(B2B) or Business to Consumer(B2C ).
Industry AGE
Are you established or new within the industry.
Business Transaction Definition
The Business to Consumer(B2C) industry is tailored for the consumers and when marketing to this industry, we’re appealing to the consumer’s emotions that focus on benefit and problem-solving. Consumers are known to change their minds more often than businesses so the budget tends to be higher to meet the ever-changing public and to compete against competitors. There tends to be an abundance of competitors in the Business to Consumer(B2C) marketplace.
Industry AGE Definition
This definition refers to the infancy of the business, whether the company is new (0-5 years) or established (5+ years). New companies’ first hurdle is surviving the first few years, as only 51% of new businesses survive their fifth year(Business Development of Canada, /). That’s why we believe that companies within the first 5 years require more support from their marketing department.
New Business
Little to no trust from the target audience at first and they have to convert the doubtful into loyal consumers which requires time, energy and I’m afraid money.
Established Business
Existing loyal customer database which contributes to a steady stream of revenue (Through social proof or repeat custom).
Now we’ve covered the definition of the two defining factors and why they should contribute to your budget plan. We’ll proceed to the next step, and that’s ensuring your business is categorized in the correct places.
Defining your Business Transaction; B2B, or B2C?
Before you can use the formulas below, it’s time for you to determine what industry your business sells to. Check out the options and see which ones relate to you.
Business-to-Consumer (B2C) refers to selling products directly to customers, bypassing any third-party retailers, wholesalers, or any other middlemen. DTC brands are usually sold online only and specialize in a specific product category: Casper, Warby Parker, Everlane, Harry’s, Outdoor Voices, AWAY, and Dollar Shave Club
You own a Salon which provides a service to the public.
B2C example, defined by Billy James
Business-to-Business (B2B) is a situation where one business makes a commercial transaction with another commercial institute. This typically occurs when: A business is sourcing materials for their production process for output. Example: Providing raw material to the other company that will produce output
You are a wholesale distributor of Tea Bags that sells to retailers(Shops).
B2B example, defined by Billy James
I strongly recommend that a business should only target one of these two Business Transaction types as it helps with the tone of voice and marketing efforts. Getting this right first is the first crucial hurdle which will lie the foundations of your budgeting and marketing efforts.
Defining your Industry Age, New or Established?
Once you’ve determined whether you’re business operates in the B2B or B2C sector, then it’s time to determine the other factor that will contribute to the marketing funds and that is whether your business is new or established.
New: 0 – 5 years of business. You’re a start-up business of between 1 -50 employees looking to make an impact in the industry.
Chad Otar, 2018
A recently launched Hyrdopnic store with 3 members of staff. (14 months old)
New Business example, defined by Billy A James
Established: 5+ years of business. You’ve made it past the crucial business years and now seeing enough healthy profits to expand.
Chad Otar, 2018
You own a Plant Nutrient company with over 30 employees that is established within your industry. (20 years old)
Established Company example, defined by Billy A James
What are the percentage allocations for your two contributing factors?
We’ve outlined what the two contributing factors are and what they mean, so now it’s time for you to work out your marketing budget.
- Business Transaction: Business Sector Target Audience
- Industry: Age of business
Business Transaction: Business Target Audience
In general 2-5% for the B2B marketing place & 5- 12% for the B2C industry.
ADAPTED FROM Guest Author, 2018.
In general 12 – 20 % for the New Companies and & 6 – 12% for Established business.
As we’ve mentioned before, these are the two essential factors to consider in your budget calculation as they are based on your business infancy and what sector your business operates in. Combined these will give you a reasonable and fair budget estimation.
Time to calculate your budget!
Calculating your Marketing Percentage Allocation
It’s simple, add the Sector with the Industry divided by two will give you a marketing budget percentage to times against your gross revenue which will give you your Marketing Budget for the year.
(Business Transaction+ Industry) / 2 = Your Marketing Percentage Allocation
Business Transaction
- Business to Business (B2B) = 2-5%
- Business to Consumer (B2C) = 5- 12%
- New Business = 12 – 20 %
- Estabished Company = 6 – 12%
Gross revenue is the total amount of sales recognized for a reporting period, prior to any deductions.
Gross revenue definition, defined by Accounting Tools, 2020.
Marketing Allocation Budget Example
An example of how we calculate the marketing budgets based on one of the above four possibilities.
New Business within the B2B Sector Budget Example
BUSINESS TRANSACTION
- Business to Business (B2B) = 2-5%
- New Business = 12 – 20 %
(New Business + B2B) /2 = Marketing Percentage Allocation x your Gross Revenue = Marketing Budget
Note: To give your business the best chance I recommend taking the top percentage allocation from each factor.
(20 + 5) / 2 = 12.5% x 550,000 = $69,375
For our example, our small company has been in operation for 1 year and operates within the B2B sector. They have a gross revenue of $550,000. They’ve gone through the above and see that their marketing percentage is 12.5%. By taking our revenue (550,000) and multiplying it by our marketing percentage (.125), we have come to a marketing budget of $69,375 for our accounting period.
Yes, it sounds expensive however 33% of small business owners’ greatest challenge is a lack of funds (I.Mitic, 2021) and if you want your business to flourish then you need to reinvest back into your marketing department to ensure your business continues to exist in the coming years.
Key Takeaways
- A Marketing Budget is a percentage of your gross revenue that you will use to invest back into your marketing department.
- Define your Business Transaction; Do you sell to businesses(B2B) or people(B2C)?
- Define your Industry Age;
- 0-5 years old = New Business
- 5+ years = Established
- Business
- 0-5 years old = New Business
- How to Calculate your Marketing Percentage> ((Business Transaction+ Industry Age) / 2 ) x your gross revenue
Summary
It depends, eh!
That wasn’t what you initially expected to see in this blog post, right? Well, understanding your budget calculations involves the consideration of two fundamental components: sector and industry. Therefore, it’s no straightforward answer here. We suggest that you research and explore what other businesses do. For our clients, we usually pose these questions to develop our answer.
Work Cited/ Resources
- Alex Kepka. (2020). Business Startup Statistics Canada (2021 Update). fundsquire.ca
- Accounting Tools. (2020). Gross revenue definition. accountingtools.com
- Business Development of Canada. (/). 10 things you (probably) didn’t know about Canadian SMEs. Bdc.ca
- Chad Otar. (2018). What Percentage Of Small Businesses Fail — And How Can You Avoid Being One Of Them?. forbes.com
- Cfhuron. (/). Canadian small business by the numbers. cfhuron.ca
- Jessica Horvath.(/). What is the average marketing budget for a small business? BDC.ca
- Guest Author. (2018). How to Calculate Your Marketing Budget [Infographic]. WordStream.com
- Guidant Financial. (2021). Small Business Trends: 2021. guidantfinancial.com
- I.Mitic (2021). Small Business Failure Statistics to Know in 2021 – A Realistic Picture. Fortunly.com
- Lendified. (/). 16 Facts About Small Businesses in Canada. lendified.com
- Patrick Whatman. (2020). Startup marketing budget: How to allocate and manage your expenses. spendesk.com
- Neil C. Churchill & Virginia L. Lewis. (1983). The Five Stages of Small Business Growth. hbr.org
- FreshBooks. (2020). 6 Business Milestones to Hit in Your First 5 Years. Freshbooks.com
- Government of Canada (2018). Canadian New Firms: Birth and Survival Rates over the Period 2002–2014, May 2018. ic.gc.ca
- Government of Canada (2019). Archived — Key Small Business Statistics – January 2019. ic.gc.ca
- Susan Ward. (2019). Why Small Businesses Fail and How to Avoid Failure. thebalancesmb.com
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