Investing in your marketing budget process is always a bit of a gamble. You carve out money for an advertisement or direct mail campaign with no guarantee it will pay off. If you track campaigns over time, it gets easier with each passing year.
The ability to forecast based on past performance is great for established businesses, but what about when you are just starting out? The typical rules of thumb (2 – 3% of annual sales to maintain consistent growth and 6 – 7% for rapid growth) don’t apply when you are about to start something new. It is also a challenge when you are launching a dramatically new product or service or opening up an entirely new type of market. It is hard to use the history of what has worked in the past to predict what will work going forward.
So it is challenging to develop a marketing budget for a business with no history, but you need to do it anyway. One marketing budget approach which can be very helpful to establish a baseline is called the “Payout Plan.”
Using the Payout Plan Marketing Budget Tactic
The Payout Plan gives you a marketing budget which is not limited by current sales. These investments are often the missing link between where you are now and where you hope to be. Accelerating the investment will allow you to achieve rapid growth.
Start by projecting what your sales volume will be three years from now. Then build your marketing budget to support a company with that level of revenue.
Work with your accountant to determine if you can carry forward expenses to reduce your tax burden. (Note – I am not an accountant. You need to confirm the details of this accounting up front.)
Many tech companies, including Amazon and Monster.com, employed a version of this strategy. Early on they realized brand awareness was key to their sales growth. They invested in television advertising, spending at a level far in excess of their size at the time. Their gamble paid off and the sales came.
The Risks of Using the Payout Plan Marketing Budget Tactic
This technique is not for every company. For example, do you remember Pets.com? Don’t feel bad if you don’t, they came and went in a flash. What went wrong? Well like Amazon, they bought ads during the Super Bowl. Unfortunately, their biggest obstacle wasn’t brand awareness.There were major holes in their business model, and no amount of advertising could fix that.
Is the payout plan right for you?
It’s not without risk. You will be investing based on future sales but it will be several years before you figure out if you were right or wrong. If you can live with the uncertainty it can be a great strategy if:
- The primary obstacle to growth is lack of awareness among your target audience.
- You have addressed the capacity issues you will face if your growth accelerates rapidly. There is nothing worse than investing in advertising driving sales, and then disappointing customers because of a lack of product.
- You are able to secure a loan or investment to prepay for additional marketing in advance of sales.
- You are committed to the long haul. Your income statement won’t look very attractive for the first few years; this is a plan that pays out over time.