Business History Books » Business Consultant » Marketing budget for new business
Marketing budget for new business
Question:
Robin Thanks for your response to Mr Tough Cookie. My intention of repeating his words, as you’ve already guessed, was because sooner or later we will all meet him. She is a typical hard working business person with predefined ideas and accountable to her superiors – aren’t we all. So, I thought this would be a good opportunity to develop a standard methodology to use next time we meet her. I suppose the ultimate test of what you say would be her reaction when she hears of your answer. Hopefully others here will also brief her on the way she should evaluate her marketing budget. I know it’s in text books. But, each person would have a different style to get the message across. Thank you again for your response. Best wishes Archie pp Tough Cookie PS: I don’t know about tip-toeing, boy, you’re swimming now (joke) :^) :^) Also, your mbmm anonymous membership card is in the post (joke) Gatekeeper: ‘My friend Archie, who lives here, is a good man. To speak with him you will need to know that, [com uk arde dear co demon net] is [T E C H D O G]. All good people can find archie at C.O.D.E’
Response:
I’m being AWKWARD now: These types of argument don’t wash. I asked you to give me a budget for marketing my product, instead you’re trying to sell me *insurance*!! Hinting at the critical mass type of argument or trying to put the fear of god in me, won’t work. Get down to business. You say 10%, I say you’re kidding me. If I left it up to you, you’ll take the whole lot!, just to cover for inaccuracies or lack of business insight. If you push it further, I will close you down. Sometimes you see me as the CEO, sometimes I appear to you as the bean counter. What’s the difference? If you cannot convince me, then I know for sure that you yourself are not convinced by what you say. Where is my return on investment? I don’t mind who teaches me, presents to me, the procedures or the facts. Talk to me in plain english so that I can explain it to my boss. As the great Protector says: Show Me the Way. Regards The Tough Cookie Gatekeeper: ‘My friend Archie, who lives here, is a good man. To speak with him you will need to know that, [com uk arde dear co demon net] is [T E C H D O G]. All good people can find archie at C.O.D.E’
Response:
> I’m being AWKWARD now:
Oh wuppee! This is just what I’m on the group for. A hard time. My life is too easy, and all my clients are much too nice, so I come to my friends for a good pasting. Listen chap, I don’t mind a hard time in the least, it’s just that I expect to send the donor a bill at the end of the month, which keeps the thing in balance quite nicely. The harder the time, the bigger the bill. I’m trying to help you here. So fire me. (snip – he says with a sense of quiet satisfaction) Right, let’s start again. This was better explained in "The Lost Post", but we’ll try. We are talking about a start-up business situation. You have no goodwill, you have no regular customers, you have no profile, nobody’s ever heard of you, and nobody cares. You probably have no demand for your product. You think there will be a demand, but you are going to have to create it. You have been along to the bank and got the money you need for manufacturing and set-up costs. All of these costs can be predicted in advance, in order to hit your targets. There is only one cost which is wholly unpredictable, and that is the marketing budget. You do not yet know what it is going to take to make a potential customer an actual one. You are not going to know for certain until you start. Marketing is a chancy business. This is not a homily, but a fact of life. Even terrific campaigns fail. If you discover that you have not allowed enough, you are fully three months down the line. Your factory is eationg up resources, your staff are beginnning to go to Niagra Falls on holiday and buy new cars. Where is the extra going to come from? Back to the bank? I think not. You say don’t scare you. Why not? Underestimating the marketing budget is so common in new business start-ups that it is almost endemic. Over-estimating the marketing budget is so rare as to be almost unknown. If you are going to err, then it is incredibly unlikely that it will be on the overgenerous side. Yet which is the most desirable? If you have over-estimated the marketing budget, where is the harm? It goes back to the bank, or you save it and stick it on the bottom line. It could be said that if it was over-estimated then the agency or the marketing department will spend it anyway, but that’s ‘cos you’ve organised your marketing budget wrong. I’ve never met a client who, left to himself, organised his budget so that he could always see what he had spent, on what, what was left, and had money for the campaign in the last three months of the year. As Jay Curry said: you start at the end, the desired turnover. You estimate out how many customers you have to reach, and how many times you have to reach them in order for them to make a buying decision. But this is an estimate. You don’t KNOW until you have reached them that number of times, and they have made their decision and started buying. Then, and only then, you are going to know whether you have estimated correctly. If you’ve got it wrong – you’re stuffed. What’s so contentious in that? I have heard from my friends who work in FMCG that a company launching a new brand allows upwards of 20% of desired turnover in their marketing budget for the first year, and I believe it. I mostly work on specialist consumer and business-to-business acccounts, and time after time after bloody time, I have to squeeze a quart into a pint pot, because the client spends like water on capital equipment, and bugger-all on marketing. I don’t know how many of this group are day-by-day involved in producing advertising and direct mail on the creative side, or in other words are having to actually make the plan work in practice. Not all that many, I would guess. Generally the guys in the marketing department, if things seem to be a bit on the high side, simply use cheaper suppliers. Being basically an ad man, I have to look at the budget I am given in order to decide what I can and cannot do. If I have a decent budget, I know without a shadow of a doubt that I can more than beat the targets the client has got. This is because I have more thinking time, so the idea is, on balance, better. I can produce a more interesting piece of work, which is more likely to catch the buyer’s attention. The average punter sees between 1,500 and 3,000 advertising messages a day. Each one crosses his vision for approxiamtely 1.7 seconds, and he notices, on average just 10. Perhaps, *perhaps*, he acts on just one each day. I have to make sure it’s mine. Unless I know what the business is, and see the research (another weak area) I cannot possibly say what to the penny, a marketing budget should be. Someone (not even you, I think) asked me for a rule of thumb. Fine. Here it is: Err on the high side. In a normal start-up I would start at 10% of desired turnover. If it was a consumer business (chocolate bars, that sort of thing) in strict competition with others, then go higher. In that case you are having to keep your product high up on a long short list for a long time, in order to get the decision. In the second year, you already have your regular customers, and a great deal (we hope) of residual goodwill and awareness from the first year’s advertising campaign. So you can drop it, perhaps by half. If you are easily hitting your targets, and people are buying very easily, then you could drop it further. It all depends. Bear this in mind. When we look at a new market, the first thing we do is to get all the papers and magazines which cover the target. We tear out every advertisement from a competitor, or indeed anyone in that business. So when we looked at, say, the horse feed market, we’d tear out all the feed companies, all the clothing companies, all the stable equipment companies, until we have everyone who will be competing for the attention of our consumer. Then we put the whole lot on the floor like a carpet, and stand on a chair. Overall, looking down, whatever you do has to stand out amongst that lot. And it has to stand out well. Then, as we look round from that position, we gradually pick up the campaigns which most stand out, and most catch our eye favourably, and these we put on one side. Then we stand back on the chair and keep doing this until everything on the floor is rubbish. Then we take the competitors and put them in order on a table. That is, order of attractiveness. Then we compare the order we have put them in with what we know about market position. 9 times out of 10, we have the order correctly for the first three, four or five. Now get this one straight (and you can stuff this down your boss’s trousers): companies which look like they belong at the top of the market generally gain that position. Companies which look like they belong at the bottom of the market will in time attain that position. My perfect client is the one which is somewhere at the top, but looks like it belongs at the bottom. Invariably (in my experience) they are in market decline. When you turn that round, you are golden boy. The other perfect client is a smaller one who has a super product, but whose advertising looks like shit. (Excuse the expresssion, he says, turning red and looking round nervously.) People buy from a short-list of possible purchases. IN order to gain a sale, you have to be on that list. In order to increase sales, you need to be further up that list, preferably at the top. Being at the top does not guarantee the sale, you understand, but it increases the likelihood. This is like loading a dice. You do not load a dice on a face, so that it goes dugga-dugga-dug onto the six. You load a corner. Any one throw can produce any number, but over time certain combinations will come up more often than statistically they should if the dice were not loaded. The further up the short list you go, the higher the statistical probability that you will get the sale. So back to your table. If you know where you need to end up in relation to the others in the market, then you know that you have to look at least that good. That takes money, but in proportion to your overall start-up costs, not much money. If, on the other hand, you look better than your market position needs to be, then there are all sorts of desirable dynamics which come into play. For a start your competitors get worried. Their salesmen start to sound out their customers (distributors and the like) to see whether there is a danger of losing them. They talk to each other, which gradually filters through into the market place. This is all advertising for you. It is all making the market more aware of your product. Your salesmen on the other hand, start sounding and looking like winners. They get all serene, which does wonders for their sales performance. They stop looking like they’ll starve if they don’t get that sale, and the customer starts to want to be in business with them. If the budget is there, then the salesmen have really well-designed sales and presentation aids. In my opinion, their sales aids and equipment are more important than their cars, and a bloody sight cheaper. When we have had the budget to do something wonderful with the salemen’s equipment, they fall on our necks and kiss us next time they see us, because every meeting goes well, goes on longer than the customer intended, and the salesman is well-received when he goes back. After ten of those he’s kicking. You’d be amazed at the number of salesmen out there with folders they’ve had to put together themselves, with leaflets stuck in pockets and photocopies of figures. It’s no good telling them that they’ll have good stuff next year; they need it now, when the impressions are being first made. That extra 3% gives you the space to do all this properly. In other words, the market takes you seriously from the start and sales will reflect it. So: Err on the high side. In relation to your start-up costs the … read more »
Response:
> I agree with the thread so far…Focus on benefits, not features!
Gee. I am so impressed. You agree with Ted Levitt and Phillip Kotler. And only sixty years later. Talk about hot news… in the 30s. JC (0000-0033) — http://web.mit.edu/camoes/public/home.html
Response:
>> What I mean is, why 10%, why not 20, 30 or 50%.
[snip} >Right, let's try again. [snip} >Look, beyond a certain figure, there is a law of diminishing returns. >At optimum spend you get a certain return, but above that figure, what >you increase is no longer worth the extra investment.
Robin, In stating that the law of diminishing return is applicable to marketing investment assumes that a market is a constant when, in fact, it is not. It is a dynamic, constantly being depleted through decay, recession and exchange and constantly growing through conversion. Up until one achieves a dominant share of a given market, therefore, the law of diminishing return does not apply. >Furthermore, if you spend, say, 10 times your total investment in >other areas on marketing, you may get a stonking return, but you would >be attracting business that you could not fulfill, which is of course >disasastrous.
Actually, in the face of such pending disaster, you raise price, increase profits, and re-invest in building even greater share and profits. - Hide quoted text -- Show quoted text ->But I have never yet met a company who fell into this trap. This could >be a problem, but it is not one likely to be made. We do not tend to >err on that side. >The company I was talking about spent #10m investing in capital >machinery. >SO they spent 75% of their start-up budget in making what they sell, >and 0.32% in selling what they make. Is that going to work? No, of >course not. >(I said all this much better the first time - but I can't remember it) >That is why you go to your hope-for end result and work backwards. You >have to predict, looking at you end result, how many exposures to your >marketing campaign each potential customer is going to require in >order to make a buying decision. Certainly that's a judgement call, >but you are only going to know for certain when the customers start >buying. If you have underestimated what will be required, you have the >wholly depressing situation of being able to see miles in advance that >you cannot possibly hit your targets. Far better to be pleasantly >surprised.
While there is nothing wrong with this type of approach on paper, it appeals to your advertising agency, and it plays well at budget meetings, it is, as you point out, historically unreliable. It lacks both the precision and flexiblity to be an effective tool to manage growth. Alternatively, there are very accurate and flexible means of developing marketing strategies and budgets which, while requiring more constant supervision, allow organizations to become more effective and responsive. They use the same tools found in manfuacturing and distribution managment. In lieu of simply budgeting for a goal, you build a model of your market and continuously input sales and market data to determine necessary levels of expenditure. The model is based on how many new prospects one must convert for each unit sold. Note that it is not based on dollars or a percentage, but on empirical data. It creates opportunities to explore alternative tactics including adding to one's sales force, doing publicity, direct mail, advertisng, events, packaging, tie-ins, etc. In other words, it allows the marketing director to maximize marketing efficiency and still grow. >And remember, if this is a start up year, then you are never again >going to be in the position of being able to set your budgets >according to what you think they need to be, but they will have to be >generated by actual trading. Better make sure the first year is a good >one, since it is going to dictate the next five, if not ten years.
Throw the fear of god into them, huh? - Hide quoted text -- Show quoted text ->If you are marketing to the consumer, then you are in general going to >need a higher proportion of advertising budget than if you are >marketing business to business, or specialist consumer. That is >because the last two are easier to target, find and reach. There are >lists, specialist consumer magazines and virtually no wastage. >Nevertheless, you do want to reach them in as spectacular a fashion as >possible. >If you do not have sufficient budget, then you have to stick flyers >through people's doors, with a 0.05% return. If you do have sufficient >budget, you can send them something which will amuse and impress them, >for a 10% return. On one occasion I sent a mialshot to businesses >which produced a 100% return. (Not everyone bought, but everyone >responded.) What I sent enraptured the recipients, but I could only do >it because we had sufficient money in the budget. The investment was, >however, returned to the company in the first two months after the >mailing, and increased for the next three, before staying permanently >at that level.
When your only tool is a hammer, every problem becomes a nail. >But the money men never see it that way, they look at the marketing >budget as a "soft" option, which they can save money on the bottom >line by cutting. But you might as well cut your own throat.
If you think they are ruthless on "marketing" look at what the bean counters do to corporate research and strategic planning. About eight years ago management at Lotus Development Corp. had on the table the budget to continue finding for our research and operational paramters to introduce a market driven concept for mail enabled applications called the "Intuitive Internet Interface" as the second generation for their Express product. They placed the funding at zero. The department shut down, the Express product was transferred to MCI and abandoned the position they held in the market to successors like Netscape who picked up the ball and profited. Such is life for a number cruncher with an attitude. Sherman Whipple, Sargent & Associates Strategic Services 10 Industrial Park Road, Hingham, MA 02043
Response:
I agree with the thread so far...Focus on benefits, not features! Ron
Response:
> What I mean is, why 10%, why not 20, 30 or 50%. > Are we saying the more the better? if so, then where > do we stop? I know this sounds simple, but, these > figures do really make me nervous! Are these figures > based on a correlation between turnover (revenue) > and sales/marketing budget for businesses in various > markets? Do we have any proof? or are they based more > on personal judgment? which perhaps explains why > for example your client was reluctant to match your > expectation. So, what do you think?
Right, let's try again. Partially, I see my thunder has now been stolen by the post by Jay Curry above. I more or less follow the same system. Look, beyond a certain figure, there is a law of diminishing returns. At optimum spend you get a certain return, but above that figure, what you increase is no longer worth the extra investment. Furthermore, if you spend, say, 10 times your total investment in other areas on marketing, you may get a stonking return, but you would be attracting business that you could not fulfill, which is of course disasastrous. But I have never yet met a company who fell into this trap. This could be a problem, but it is not one likely to be made. We do not tend to err on that side. The company I was talking about spent #10m investing in capital machinery. SO they spent 75% of their start-up budget in making what they sell, and 0.32% in selling what they make. Is that going to work? No, of course not. (I said all this much better the first time - but I can't remember it) That is why you go to your hope-for end result and work backwards. You have to predict, looking at you end result, how many exposures to your marketing campaign each potential customer is going to require in order to make a buying decision. Certainly that's a judgement call, but you are only going to know for certain when the customers start buying. If you have underestimated what will be required, you have the wholly depressing situation of being able to see miles in advance that you cannot possibly hit your targets. Far better to be pleasantly surprised. And remember, if this is a start up year, then you are never again going to be in the position of being able to set your budgets according to what you think they need to be, but they will have to be generated by actual trading. Better make sure the first year is a good one, since it is going to dictate the next five, if not ten years. If you are marketing to the consumer, then you are in general going to need a higher proportion of advertising budget than if you are marketing business to business, or specialist consumer. That is because the last two are easier to target, find and reach. There are lists, specialist consumer magazines and virtually no wastage. Nevertheless, you do want to reach them in as spectacular a fashion as possible. If you do not have sufficient budget, then you have to stick flyers through people's doors, with a 0.05% return. If you do have sufficient budget, you can send them something which will amuse and impress them, for a 10% return. On one occasion I sent a mialshot to businesses which produced a 100% return. (Not everyone bought, but everyone responded.) What I sent enraptured the recipients, but I could only do it because we had sufficient money in the budget. The investment was, however, returned to the company in the first two months after the mailing, and increased for the next three, before staying permanently at that level. But the money men never see it that way, they look at the marketing budget as a "soft" option, which they can save money on the bottom line by cutting. But you might as well cut your own throat. I remember what I said about the Gurdiwangle Fobbler in the "lost post", but now I can't for the life of me remember why. Anyway Robin Aldersey-Taylor Strategic Advertising Consultant and general Good Egg
Response:
| [ModSpeak: Hmmm, Archie, I don't want to see | you joining MBMM Anonymous <g>] Man! MBMM Anonymous is for those who cannot control the urge to constantly read and re-read the MBMM messages hoping that they’d discover something different every time they read the messages. I NEVER do that!! Who says I’m addicted?! I just check the news server about 50 times a day. And every time I tell myself: "OK, next time you will see new messages". So, what’s wrong with that? I’m not addicted. I must go now. Hmmm, what did Mac mean by….. May be I should read his message again, in case ……. Archie Gatekeeper: ‘My friend Archie, who lives here, is a good man. To speak with him you will need to know that, [com uk arde dear co demon net] is [T E C H D O G]. All good people can find archie at C.O.D.E’
Response:
- Hide quoted text — Show quoted text – >| However you look at it, selling a product or service >| is a gamble. Things work which really have no right >| to, others die a death for no apparent reason (though >| there usually is one). If you are going to put your future >| on the line by starting a company, then for heaven’s sake >| (and yours) start with a decent stake. > Hello Robin > What I mean is, why 10%, why not 20, 30 or 50%. > Are we saying the more the better? if so, then where > do we stop? I know this sounds simple, but, these > figures do really make me nervous! Are these figures > based on a correlation between turnover (revenue) > and sales/marketing budget for businesses in various > markets? Do we have any proof? or are they based more > on personal judgment? which perhaps explains why > for example your client was reluctant to match your > expectation. So, what do you think?
I can’t believe it! I spent an hour replying to this post and was just explaining about how to market a Gurdiwangle Fobbler when, typing with a blur of inconceivable speed and accuracy there was a sudden black flash on screen and the whole bloody lot disappeared, to be replaced with a single "s" character. I worked out that I must have hit ^A rather than ShiftA and then wiped it with the next keystroke. I have hunted, I have searched, no tempory file contains it, no backup exists. I mourn, it was brilliant, funny, sharp, witty, erudite and would have been possibly the final word throughout the industry on marketing budgets. I will never again reach such heights of genius, it is gone forever. And what is worse, I have spent the free time I had today and now must work for the rest of the day on a presentation tomorrow. Look, I will reply to this, so hold that thought. Tomorrow is Monday, so I’ll write it in the evening. Cheers Robin Genius and general Good Egg.
Response:
> I’m teaching a course to budding entrepreneurs and we have to review budgets > as part of their business plans. > My question: How much should a brand new business spend on marketing, and > also specifically on advertising, as a percentage of its forecast gross > sales volume? > I’ve been using the standard 3 to 7 percent as a guideline, but am > interested to hear other viewpoints.
My suggestion is zero. That is, until after they have tried a few free and low cost marketing techniques. IMHO, your "budding entrepreneurs" should become fans of the idea of not paying for advertising, paying for results. If they do, they can have a practically infinite advertising and/or marketing budget. Just three free or low cost techniques are: press releases, strategic alliances and the bundling of their products/services with complementary ones. Just my 2 cents. Hope this helps, Al Montero ZeroCost Marketing Please do not reply to this account. I just use it for posting. To contact me directly, send e-mail to my user id "zcm". It is at mindspring dot com.
Response:
[ModSpeak: Welcome Robin -JG] > I’m teaching a course to budding entrepreneurs and we have to review budgets > as part of their business plans. > My question: How much should a brand new business spend on marketing, and > also specifically on advertising, as a percentage of its forecast gross > sales volume? > I’ve been using the standard 3 to 7 percent as a guideline, but am > interested to hear other viewpoints. >My suggestion is zero.
Zero? Golly. Is that wise? Um, I’ve just found this newsgroup and I am tentatively sticking my toe in the water. As a blind rule of thumb, I generally recommend to my clients at least 10% of projected turnover, expressed as a startup investment, and thereafter as an overhead (though arguably it could perhaps need to go as high as 20% in the startup year). It may not require that much, but then that money can be put into another budget, or made to look like profit, whatever. The reverse, however, is a disaster. One client springs to mind who was a subsidiary of a household name in Britain. In their startup year, they spent #10,000,000 on capital equipment to make white plastic, and put in a marketing budget of #40,000. I warned them a hundred times that they hadn’t got a cat’s chance at that rate, but they thought I was being merely true to my calling, and it sounded like quite enough to them. God, you could buy a house with #40,000! They made a lot of white plastic but they – didn’t – sell – much – of it. By the time the first year was over, the product was dead in the water, the managing director had been fired, and all the good salesmen had moved to other companies. People who start businesses which produce goods are generally engineers and production specialists. They understand production, and capital equipment, and firmly believe thast if you build a better mousetrap, then the world will beat a path to your door. It doesn’t. Why spend a fortune on starting a company and bugger all on selling what you make (or provide)? I once used to drink in a London club much used in the small hours by croupiers. They used to piss us off by coming in after we’d spent all night on the fruit machine and then win all the jackpots. Finally we asked them how they did it. They said, if you are going to gamble and not just be a punter, then the first thing you need is a decent stake. The machine paid out #250 which was rather more then than it is now. We used to go up to it, put in a tenner, come away with a fiver, go back to the bar for a while, and then repeat the process half an hour later. They walked up to it with #50 or #75 at least and walked away after a hour having doubled their money. However you look at it, selling a product or service is a gamble. Things work which really have no right to, others die a death for no apparent reason (though there usually is one). If you are going to put your future on the line by starting a company, then for heaven’s sake (and yours) start with a decent stake. I do lecture on advertising to the business school at the RAC, and this is, anyway, what I tell my students. I have yet to have one ring me and accuse me of making them waste their money! I trust this at least gives another perspective. Cheers Robin Aldersey-Taylor Advertising Copywriter Strategic Advertising Consultant Advertising Lecturer Winner of Gold Echos And General Good Egg (this may not work long term as an address, but I may think of one that does.) P.S. What does your course cover?
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Hello Paolo, I think the reason the product oriented models "don’t" work for you is possibly you are thinking mainly of your own self interest. I suggest you might want to first find a product or service you are excited about (passion part) and link it up with needs within your market area. Focus on value-added to your customer/client. If you can show your prospect how you will make his/her life/business/etc… more rewarding, profitable, simple, safer, etc….. You have good shot at growing a long lasting and profitable business. Once you have found this winning combination, you are ready to put your energy and apply the "common sense" business development information found here and other sites on the net for improving each part of your business. J.P. Solyom KS Business Development
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> I’m teaching a course to budding entrepreneurs and we have to review budgets > as part of their business plans. > My question: How much should a brand new business spend on marketing, and > also specifically on advertising, as a percentage of its forecast gross > sales volume? > I’ve been using the standard 3 to 7 percent as a guideline, but am > interested to hear other viewpoints.
How we help companies calculate marketing/sales budgets for (new) businesses using our Customer Marketing methodology: 1. Determine your financial objectives, i.e. X turnover, y cost of products, z gross margin. IN this case let’s say you want 300,000 turnover. 2. Determine how many of which customers will meet your financial objectives, i.e. one customer who does 100,000, two customers who do 50,000 each, 5 customers who do 20,000. 3. Determine what you need to identify/create/keep/upgrade these kinds of customers, i.e. one TV advertisement, mailing of 10,000, 500 telephone calls, 27 sales visits, etc. 4. Calculate the cost of the marketing and sales activities which you will need to identify/create/keep/upgrade the customers you need to reach your financial goals. If the numbers are too high, revise your customer goals. If the numbers are OK, that is your marketing/sales budget.
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| However you look at it, selling a product or service | is a gamble. Things work which really have no right | to, others die a death for no apparent reason (though | there usually is one). If you are going to put your future | on the line by starting a company, then for heaven’s sake | (and yours) start with a decent stake. Hello Robin Quite right, no problem with your comment. The above paragraph tells me, you’re hinting at a ’critical mass’ type of argument – which is fine. But, I have difficulty grasping this point though: | …. I generally recommend to my clients at least | 10% of projected turnover, expressed as a startup | investment… What I mean is, why 10%, why not 20, 30 or 50%. Are we saying the more the better? if so, then where do we stop? I know this sounds simple, but, these figures do really make me nervous! Are these figures based on a correlation between turnover (revenue) and sales/marketing budget for businesses in various markets? Do we have any proof? or are they based more on personal judgment? which perhaps explains why for example your client was reluctant to match your expectation. So, what do you think? By the way, this newsgroup does carry a health warning which says: This newsgroup is highly addictive! therefore post at your own risk :^) :^) Archie [ModSpeak: Hmmm, Archie, I don't want to see you joining MBMM Anonymous <g>] Gatekeeper: ‘My friend Archie, who lives here, is a good man. To speak with him you will need to know that, [com uk arde dear co demon net] is [T E C H D O G]. All good people can find archie at C.O.D.E’
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Hi, Anybody got any ideas for service businesses – such as consultancies? The product oriented models don’t work for us… Regardz, Paolo F. Cantoni Tel: +61-2-9498 5945 Director Fax: +61-2-9418 4402 -Semantica- Changed>> Cell: +61-416 11 00 95 << 45 Kendall Street Web: http://www.semantica.com.au Pymble NSW 2073 AUSTRALIA
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| | …. gross sales is useless. What is far more important is the gross | profit, which may be anywhere from 100% to 1% of gross sales, | especially for entrepreneurial businesses. Having said that, it is | possible to work percentages of the gross profit. I understand the above, no problem. But I’m not quite sure I fully understand the following paragraph – are we still concerned with gross sales or profit (ie 70% + 30%): | …… there are only three parts to a | business: Production. Selling, and Administration (which includes | profit). All three are essential to a successful business. The best | split between these is 70% into Production and Selling, and only 30% | to administration. | this can take almost anything up to the full 70% of gross profit. I think I’m missing your main point. So, how do I for example estimate my profit from this equation: Sales – Costs = Profit. Where are the costs in this ’simplified’ approach. I think this is my main difficulty. | | ….. it’s resulted in an almost 80% success rate…… | Not bad for a new business survive and thrive rate. I think I’d better join your program :^) Take care. Archie Gatekeeper: ‘My friend Archie, who lives here, is a good man. To speak with him you will need to know that, [com uk arde dear co demon net] is [T E C H D O G]. All good people can find archie at C.O.D.E Open sesame!’
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> I’m teaching a course to budding entrepreneurs and we have to review > budgets as part of their business plans. > My question: How much should a brand new business spend on marketing, > and also specifically on advertising, as a percentage of its forecast > gross sales volume? > I’ve been using the standard 3 to 7 percent as a guideline, but am > interested to hear other viewpoints.
Gord, 3-7% is a standard, so is 5-15%, and 1-8%, and of course, 0-15%. My point is, there really is no standard, but there is generally a common range for specific industries. Since yours is a tight niche within a larger industry, it’ll be near-impossible to find such a range. What I recommend to clients and others is to develop a marketing plan and supporting tactical programs. Determine the annual cost of your entire plan and then decide if you can or will be able to afford it. Granted, you may not have all the capital today for the whole year. But because you should have already projected sales, you should have a good idea of whether you can absorb those marketing expenses. If the total budget exceeds your capabilities, prioritize your mktg programs into 3 segments: those that are essential, those that would likely be effective, and those that would be nice to do. Cut your budget by eliminating a part of this third group, but still keeping that part of the plan handy, in the event you want to grow, experience higher-than-expected sales, or want to use those tactics the following year. Best regards, Raman Chadha Explorit Entrepreneurial Services Business coaching, planning, and education that helps entrepreneurs build companies and stay focused.
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Gord, the amount you spend on your marketing should be based on what you expect the "ROI" to be. If expressed as "What will be my return on my investment", It takes on a whole new meaning rather than "standard". It will also help the new entrepreneurs think correctly as everything they do as an entrepreneur should be thought of as What will be my ROI? Jeff — Totten Transportation Services, Inc. A Transportation Marketing Company Solutions In Transportation Jeffrey J. Totten – Hide quoted text — Show quoted text -> I’m teaching a course to budding entrepreneurs and we have to review budgets > as part of their business plans. > My question: How much should a brand new business spend on marketing, and > also specifically on advertising, as a percentage of its forecast gross > sales volume? > I’ve been using the standard 3 to 7 percent as a guideline, but am > interested to hear other viewpoints.
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writes: [snip] >My question: How much should a brand new business spend on marketing, and >also specifically on advertising, as a percentage of its forecast gross >sales volume?
[snip] Gord: I think it’s important to tell your students that the percentage-of-sales approach may be easy and convenient to use, but holds several flaws. Check out Aaker’s, Batra’s, and Myers’ Advertising Management (5th ed., 1996, Prentice Hall: New Jersey, pp. 541-581) from where most of the following was taken: 1) When a brand (or business) is just being introduced to the market, it is necessary to make heavy investments in advertising during the first couple of years of the brand’s lifetime. Your 3-7% rule of thumb may lead to inaqdequate budgets for promising brands that could potentially become competitive with more advertising muscle. At Colgate-Palmolive, the guide is to base the advertising expenditures on the total gross profit, which is the total sales less the product cost, as follows: *Advertising in first year equals twice the gross profit. *Advertising in second year equals half the gross profit. *Advertising in third and succeeding years equals 30% of the gross profit. 2) When a brand becomes well-established (and dominant) in the market, it is usually not necessary to advertise as heavily. In this case, your rule of thumb may lead to excessive advertising expenditures. 3) When a brand becomes unpopular (leading to a decrease in sales), the percentage-of-sales approach suggests less advertising when in fact an increase in advertising expenditures may be needed in order to reverse the trend. 4) The approach ignores brand profitability, by looking only at brand sales. A more logical rule would be to use a percentage not of sales, but of a brand’s gross margin or contribution-to-overhead. 5) Advertising is generally only one of many factors influencing sales (price, distribution, product features, competition, consumer tastes, etc.), and it is difficult to isolate its contribution to those sales. 6) The contributory role of advertising often occurs primarily over the long run. Thus, the percentage-of-sales figure may be out date and imprecise. Hope this helps. Good luck with your class! Torben
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> I’m teaching a course to budding entrepreneurs and we have to review budgets > as part of their business plan. > My question: How much should a brand new business spend on marketing, and > also specifically on advertising, as a percentage of its forecast gross > sales volume?
First, if they are real entrepreneurs, they are going to ignore things like budgets. Their business plans will concentrate more on what they are going to do, rather than how much it might cost. The only businesses that can work to a budget are those where the cash flow is large enough that they don’t have to worry about a couple of percentage points. Next, gross sales is useless. What is far more important in the gross profit, which may be anywhere from 100% to 1% of gross sales, especially for entrepreneurial businesses. Having said that, it is possible to work percentages of the gross profit. When teaching our workshops, I start by using a model of business (very simple version). This states that there are only three parts to a business: Production. Selling, and Administration (which includes profit). All three are essential to a successful business. The best split between these is 70% into Production and Selling, and only 30% to administration. Marketing is part of the administration (as is planning, management, corporate advertising). Selling includes advertising, as well as salespeople going out and doing the signing up. So, depending on just how much production is required, this can take almost anything up to the full 70% of gross profit. So far, we’ve introduced a few hundred people (very small numbers at a time) to this whole approach, and it’s resulted in an almost 80% success rate in the businesses that have applied it. Not bad for a new business survive and thrive rate. The Ur-Referent Boyd (Peter B Budvietas)
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> I’m teaching a course to budding entrepreneurs and we have to review budgets > as part of their business plans. > My question: How much should a brand new business spend on marketing, and > also specifically on advertising, as a percentage of its forecast gross > sales volume? > I’ve been using the standard 3 to 7 percent as a guideline, but am > interested to hear other viewpoints.
Hi gord! I was giggling on this quit a bit … when I first started off, I was thinking about this same thing: 1. If you take a percentage of your forecast gross sales volume, all you get is a number. It’s really just a number, as your "forecast gross sales volume" is just a bet when you first start business. 2. If you go up with your percentage (and your number) this will raise the "forecast gross sales volume" and in turn raise again your number that comes out of your percentage of the "forecast gross sales volume" (which in turn raises the "forecast …"). You end up with all your money spend on marketing and geting a zitrillionaire in the first year. 3. How much you spend has just a partially relation to how good your marketing is. You can spend tons of money for road sign posts and TV-Spots next to soap-operas, when you should focus on a small number of business-to-business prospects that could be best reached with a few letters and phonecalls. Money does not guaranty good marketing. So marketing (IMHO) should not be started from the "how much will we spend on it" point of view. <JOKE> Except if you come to spend your money with me of course 
, I’ll even rubb my hands like the used car salesmen are doing: "So HOW MUCH were you going to spend?" </JOKE> After all this negativistic thoughts, lets go at it the other way round: Get your act together on what marketing/advertising instruments you need and see how much that costs. "Do we have that much money?" If "yes", then go ahead. If "no", then "lets see how we can change our plan" (or raise more money) and get the same results. And then, here is a quote from Jay C. Levinson (out of Guy Kawasakis Book "How to drive your competition crazy"): [Answering to the question "What are the traits a guerilla marketer must have? as point 6] "The [sixth and] last is aggressiveness – in two areas. Area one is spending. How much does the average U.S. business invest in marketing? Last year they say the number was 4 percent. A guerilla’s attitude is, ‘Is that all? What if I put in 8 percent?’" Of course you could say: "My students don’t have to be guerillas, just marketing the plain old style is good enough for them to learn." You are always fine saying that, just pray that your students wont cross the street when one of my customers is approaching … ;?) Regards, Sascha — Find out more about this guy "Sascha Welter"? it’s on <http://www.access.ch/private-users/swelter/> … in english … und auf Deutsch POWER(book150)USERs, Dog, Business, QTVR and more …
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I’m teaching a course to budding entrepreneurs and we have to review budgets as part of their business plans. My question: How much should a brand new business spend on marketing, and also specifically on advertising, as a percentage of its forecast gross sales volume? I’ve been using the standard 3 to 7 percent as a guideline, but am interested to hear other viewpoints.
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> I’m teaching a course to budding entrepreneurs and we have to review budgets > as part of their business plans. > My question: How much should a brand new business spend on marketing, and > also specifically on advertising, as a percentage of its forecast gross > sales volume? > I’ve been using the standard 3 to 7 percent as a guideline, but am > interested to hear other viewpoints.
Do you want academic theory or do you want the real world? In academic theory you are right on since you can feed that figure into a spreadsheet and play what-ifs on it all day long. In the real world the rule of three applies. It is based on doing experiments and from the reslts perform a fairly accurate forecast. For example in the case of a recent new product introduction I sent five hundred copies of a flier to a targeted audience and measured the responses. I got one response and made a follow up call. They did not understand what I was offering. Based on this response I put the prototype in my garage where it has been in use ever since. But the project died a natural death. Another new product introduction has a completely different formula. If it can be demonstrated, fully 50% of the people will buy it. Now you calculate the cost of demonstrating the product, the cost of manufacturing it and determine if it will be profitable. Another example is a typical salesman who knows from experience that he will make one sale per every three presentations and he needs 15 referrals for each presentation or 50 cold-turkey calls per presenation. This person can accurately forecast their yearly income almost to the penny. The proportional formula is among the most powerful tools of all — and the least used in academia. (From my observations. For instance in teaching college students a course in manufacturing I routinely gave them a starting exam in which the proportional formula was to be used. Over three years I had only two or three students who knew how to use it. — Incredible!)
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[This followup was posted to misc.business.marketing.moderated and a copy was sent to the cited author.] > I’m teaching a course to budding entrepreneurs and we have to review budgets > as part of their business plans. > My question: How much should a brand new business spend on marketing, and > also specifically on advertising, as a percentage of its forecast gross > sales volume? > I’ve been using the standard 3 to 7 percent as a guideline, but am > interested to hear other viewpoints.
Here in the UK 5% has been the norm – but I’d have said for a start-up it could be quite a bit higher. Anything involving selling off-the-page or by mail order, for example, is going to have to spend a lot more than 5% to generate enough response to be viable. Unless you have an *awful* lot of friends and relatives, of course Mike Hewitt Group Editor Marketing magazine (UK) http://www.marketing.haynet.com