Marketing budget for a start up

Hilarie wrote:

As I determine my marketing budget, I am curious as to what percentage of ones budget you feel a budding design business should dedicate to marketing and what return should one expect for the first year or so on that percentage.

Typically, when you’re doing things according to a textbook, you allocate a percentage of estimated sales to sales/marketing. It can range from 5-25%, depending on the nature of the industry and what phase the company is in (startup, growth, etc.). Realistically, if you’re writing a business plan for yourself, a blueprint to follow to grow your company, it’s practically meaningless to use percentages unless your projected revenues are so large (millions) that a percentage based estimate would provide you with an ample budget.

You need to really know the costs. You need to have some idea of what it will take to launch your line and get placement in the projected number of retail stores. You could find that it takes a tremendous amount of money to reach your goals in the startup phase.


The reality is you have to spend on marketing, and you probably will spend more than you anticipated. Gotta print line sheets, that’s a sales/marketing expense (and even in black and white, there still is usually a cost). Gotta travel to make sales calls, sales/marketing expense. Gotta pay commissions to reps, that usually falls under sales and marketing too. Photos, sales/marketing, samples, sales/marketing. Yes, most people think that sales samples are a production expense, well technically speaking your fit samples are but your sales samples are a sales/marketing expense.

So what you really have to do is figure out how much you need to sell. Then you figure out, using an average based on your past orders, how many stores will need to buy from you to meet those sales projections. Say you need to sell 200 pcs of your spring collection and on average, each store orders 5 pieces. Well then, you need at least 40 accounts placing orders. How are you going to get 40 accounts to place orders? What are you going to do and how much is it going to cost? This is how you get your numbers.

You have to do that, as a small business, otherwise your projections, estimates and percentages are meaningless because you don’t actually know how you’re going to get there and what it’s going to cost.

You may find that trade shows are not the most cost effective way to reach your prospective buyers. You may be able to rabble up those accounts hitting the road and getting a commissioned sales rep. You may find other, creative and less expensive methods of reaching those retailers.

It’s hard to give a blanket percentage because some product lines will take more money to launch than others. Some product lines are no brainers, Some product lines are innovative and pioneers and will make it through exposure and word of mouth; some are “me three” products in a crowded market. Having been through the business plan thing a fair number of times, I find that the projections and estimates are most helpful when they are based on strategy and planning, and you can actually use them to run your business because the data is qualified, versus getting textbook scenarios and textbook percentages.

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12 comments

  1. Andrea says:

    Good common sense approach, Miracle. One thing I would like to mention is that some of your start up marketing expensenses need to amortized over the life of your business, like web development, logo and other marketing materials that are not “directly” related to a collection. I thorougly agree, however, that working backward is the best way to calculate start up marketing costs.

  2. Miracle says:

    One thing I would like to mention is that some of your start up marketing expensenses need to amortized over the life of your business, like web development, logo and other marketing materials that are not “directly” related to a collection.

    Do you mean amortize in accounting terminology? And is this common that a business would amortize expenses for websites, logos and such, over the life of the business? I’ve always understood amortization as an allocation of the expense over a fixed period of time (and the life of the business would be a variable time frame). So if you could please explain further, I would appreciate that. I don’t understand how you could amortize the expense over the life of a business, in the start up phase, because what number would you use to determine that allocation?

  3. J C Sprowls says:

    I concur. Website development and certain other startup expenses are capitalized expenses, which can only be depreciated over a fixed period of time.

    The article is pragmatic and sound. During startup, it’s difficult to project (though you can certainly try) how much money to allot to different areas. In the end, it costs what it costs to get started. Some costs have tax consequences (good or bad), while others do not – as in the aforementioned example.

    Once you’re established, it becomes easier to allocate the budget because things become more clear. Also, you have data you can evaluate, which just isn’t available during Y1. Like Miracle, I would not suggest you try to “back into” a marketing budget during your first year. I suggest you outline the minimum requirements you need to get started and then focus on setting goals and raising funds.

    For example: if a website is necessary for your business, then determine the appropriate budget by obtaining several quotes. Always think: ‘minimum requirement’ and ‘minimally necessary’ – this is bootstrapping.

    The same for product development. Consider the absolute minimum you need to be market ready for the first season (3 pcs, 5 pcs, etc.) Go ahead an sketch 100 if you want; but, be brutal about what you release and get quotes from several sources so you can determine what is reasonable to spend. Be aware that your decisions about what to release will be heavily tied to cash-on-hand. You may choose to release a style that is cheaper to produce or has long-term returns over a “cute” or “quick hitter”.

    I always start every micro business w/ a $500 marketing budget. Any arbitrary number will do, though!

    Every year, when I’m planning, I evaluate the things I did last year, which things bore the most appropriate fruit, then move money away from the dead wood. I either ‘up’ the most productive choices or diversify the strategy. Let’s say I plan to increase revenue by 200% for 2008, I would adjust my topside (SWAG) estimate for marketing to $1000 and then shop to see what I can get. If $1K doesn’t support the goal, I look at what can be economized, elsewhere, in order to free more money for marketing.

    Marketing budgets, as Miracle outlines, are relatively boilerplate/textbook for established corporations. Every company has a fixed percentage of the previous year’s revenues they allot toward marketing for the new year. As MW says, unless you have significant sales volume, percentages are useless for the micro-business – it’s all about scale.

    While I consider a website to be a marketing vehicle, I do not consider that its sole purpose. A website is the virtual representation of your workspace – an overhead expense that is relatively fixed. Launching a website takes a long time to plan because you have to develop ways to drive traffic to your site. This is where marketing comes in: driving traffic to the site and giving people the ‘what’ they came to site for. I think investing in the physical workspace is the more prudent investment for a startup.

    Frankly, I get a much better return for the $90 decal on the rear window of my truck. The sign discloses the website address; but, people call 9 times in 10. I have yet to hear anyone volunteer that my website is insufficient for their needs. Of the traffic generated by the sign on my car, maybe 3 (out of 60) per month pass through to my email – which they get off the website.

  4. Andrea says:

    Sorry, Miracle…I probably used the wrong word…happens from time to time; but the principle is the same. You would just take an arbitrary(but reasonable) time frame and divide it out. So if I am paying (per season) about 1500 in marketing materials and activities that directly correlate with the season I am launching I would then take the cumulative expense of the initial marketing materials and divide it out over maybe a 2-5 year stretch and capitalize it in with the seasonal expense and then I would have a more reasonable amount to work against. If you pay $500 for your website it’s not really important to do that…but some web development can be upwards of $10,000 in which case you would want to do that, otherwise it’ll skew badly. I’m not an accountant, so I don’t always have the right terminology, but the principle is sound.

  5. MW says:

    Andrea, thanks for the explanation.

    JC brings up something else and I’m not sure if it warrants a separate post or not, but people who haven’t done something before tend to grossly underestimate how much it costs.

    the most typical example I can think of is a website.

    A lot of people think the cost/expense ends with the development and hosting. They don’t consider the cost to maintain the website (especially when they are unable to do it themselves), potential upgrades to their ecommerce software (which may not be free), SSL certificates (if they are not using an ASP), and search engine optimization.

    A lot of people think that websites are “just found” in search engines, few will invest the time to learn how to optimize a website and almost all are amazed at the costs of hiring someone to do so. Then you have things like online advertising, pay per click or affiliate programs that a lot of start ups don’t consider becuase they think their cost ends at development and hosting.

    No that all of these are essential, but a lot of businesses will need them and did not anticipate the cost.

    This is why you have to be specific. I’m really anal retentive when it comes to small and (love this term JC) micro business financial planning. You really have to look at what, when, where and how. HOW am I going to make this work. WHEN do I have to spend the money, WHAT do I have to buy or pay for?

    You can actually build a business plan by doing the financials first. A lot of people do the written portion first. But if you really crunched some numbers, you would pretty much have what you needed to write the text.

  6. Andrea says:

    I completely agree. I usually tell my clients to focus on operations, marketing and accurate financials…everything else is truly arbitrary. I agree that a separate post may be warranted…you’re right, there are ongoing expenses that are relevant, especially if you are doing e-commerce…again, I think it depends on the purpose. Some companies may only want it to be an online extension of their business card (not that I necessarily advocate for that).

  7. J C Sprowls says:

    Miracle,

    I think we do need to discuss business and marketing more frequently. There’s a *lot* that goes into a DE firm. I’m curious if it’s prudent to look for other partners in the marketing arena.

    For example, Andrea (and I) like Guy Kawasaki’s and Seth Godin’s blogs. I hesitate to say they are equally as substantive as FI but they raise topics on a timely basis, point out references and such.

  8. MW says:

    Ok,

    Here’s the thing. Amortization/capitalization are largely accounting terms that really have to do with end of year financial statements and taxes. For most small businesses, these aren’t budget concerns. If you are a small business and you have to spend $10K on your website, you have to spend $10K now, you don’t get to spend $2K over a five year period, and likewise should not budget as such. Large corporations usually play around with using capitalized expenses in their budgets because they have budget goals and restrictions and they want to stay on plan. They also defer expenses to other financial reporting periods (quarters or fiscal years) so that they meet their budget goals for the current reporting period so that the financial statements are on plan.

    Small businesses generally can not plan this way because they have to rely on having accurate projections for the expenditure of cash. Otherwise, they suffer the all too often problem of being under capitalized and running out of cash. If you have to spend $10K on your website right now, then this year’s budget should include $10K for your website. Otherwise, you may find that you haven’t allocated or planned properly for expenses and you run out of money. When it’s time to do your taxes, you may have the ability to capitalize that over a period of time and take that $2K a year over 5 years, or in some cases, you may have to capitalize certain expenses, but in reality you had to pay the money upfront, not over a period of time.

    These are different concerns. Small businesses have to look at budgeting differently than large corporations.

    Another thing is that the period over which you amortize/capitalize or depreciate expenses is not arbitrary. In most cases, these periods of time are actually governed by IRS guidelines. You don’t get to take these expenses over the life of the business because remember, we are talking tax issues now. In cases where there are no hard and fast IRS guidelines, there are usually generally accepted periods of time that are used by accountants, which is why a lot of small businesses should have an accountant. You could find yourself in financial trouble using an arbitrary, but reasonable, time frame for capitalizing an expense when in fact there is an IRS guideline for that purpose.

    This whole thing has kind of sidetracked the initial post because the reality is as a small/micro business when you budget, you budget for what you have to spend. Substituting with corporate reporting and tax practices on your budget could lead you to be out of synch with your cash flow.

  9. Andrea says:

    again, well written. My purpose for bringing that up in the first place was to point out that you have both fixed and ongoing costs and that you shouldn’t work against that total cost in your first season. I don’t even think that it’s allowed to depreciate those kind of expenses…basically, it’s unreasonable to take your entire marketing development and expect to work that into your first sales cycle…it’s better to look at it over time and cost it in as it makes sense to your company.

  10. Carmel Dolcine says:

    Great post and great comments – I hope we can see more of the same in the near future.

    Another point that needs to be made is that DEs also have to learn to accurately forecast and track the results of specific marketing and sales methods, then recalibrate their efforts for future seasons.

    I think it makes sense to outsource certain aspects of marketing, but the cost of such should be relative to the bottom line – i.e., any outside consultant or company should be responsible for producing according to a quota in order to receive payment. Everything done with outside marketers should be performance based – consultants tend to overestimate their prowess and impact then underdeliver, while charging unfair fees. I consult – so I often hear the horror stories.

  11. Andrea says:

    Yikes! See my post in the forum about pr consulting. A good consultant never lets a bad campaign continue or one that is under performing. PR and marketing are a marriage between operations and outreach. If your consultant suggest you need an internal change to implement a marketing plan and you don’t do it…it is not the fault of the consultant. I am sure there are horrible consultants out there, but a failed relationship is usually the fault of both sides. ROI can be a difficult thing to assess any one factor to…but there are ways to calculate it. It tends to be rather intangible at times.

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