Wednesday, September 28, 2011

The 3% Give or Take Benchmark

One of the biggest challenges non-profits have is finding a benchmark for budgeting their marketing and communications activities. None exist. That’s why many non-profits underfund or inconsistently fund their marketing and communications operations.

The 3% Give or Take Budget Benchmark is designed to give non-profits the information they need to benchmark their marketing and communications budget. It is simple, flexible and easy to use. It is admittedly not the most sophisticated of benchmark systems. Some may find it to be simplistic and argue that a more complex approach is needed. That may be true. However, this benchmark has advantages. It is applicable to almost every kind of non-profit, large or small. Being simple and flexible makes it more usable, and that will be welcome news to the many non-profits that have neither the time or the skills to do anything more complicated. And, at the end of the day, The 3% Give or Take Budget Benchmark is one of the only budget systems of its kind available. If it is better than nothing, than that is a step in the right direction because there is nothing else.

This benchmark won’t solve all the challenges of making a non-profit marketing and communications budget but it will give organizations a great place to start. The hard work of making a budget still rests with non-profit organizations themselves. Ultimately, it is our hope that this benchmark will foster more discussion and argument about marketing and communications in the non-profit sector.

The benchmark starts with a percentage. Budgeting can be done many ways, but one of the best methods from the for-profit world is to peg marketing costs at a percentage of sales. This has many advantages. First, it will vary with changes in the organization’s operations – when sales are down, the marketing budget will also drop and vice versa. It effectively makes marketing “affordable”. Second, it ties marketing and communications to the overall effort of the organization. Too many times, non-profit leaders fail to see the direct relationship. This approach will make it clear what marketing and communications does. In many non-profits there are no “sales”. There is operating income from funders and governments or there is fundraising revenue or a mixture of both. To make things simple, the percentage used here should be the non-profit’s total operating budget. However the money is raised, a non-profit’s operating budget is its “sales”.

What percentage should be used? In the for-profit world, this is often a very easy question to answer. The Chief Marketing Officer Council did a survey in 2007. It found that 16% of for-profit companies spent between 5-6% of revenue on marketing and 23% spent over 6%. It also found that businesses introducing new consumer products sometimes spend as much as 20% of sales on marketing. Another study by Go-to-Market Strategies found 30% of companies spent between 3-5% of revenue on marketing, with 45% spending over 6%.

It is tempting to think that the non-profit world’s marketing and communications budgets should mirror the for-profit world. A case can be made that in fact non-profits need to spend more than for-profits on marketing, not less. However, everything points to the fact that the sector would have little appetite for such a radical increase. The best study on this issue is the 2008 study by the American Marketing Association and Lipman Hearne which found that the average non-profit marketing budget was between 2% and 3% of the total operating budget.

For all these reasons, this benchmark uses a percentage of 3% of the operating budget. This benchmark is called 3% Give or Take for a reason. Three per cent is about right. Arguments can be made for spending less or spending more. In fact, we wish it could be significantly more, but that is not where the sector wants to go. In absence of any better data 3% is the best choice and the one that makes the most sense to us based on our experience and that of many of our clients.

So, if a charity had an operating budget of $500,000 its base marketing and communications budget would be $15,000. If it had an operating budget of $5 million, it would be $150,000.

The flexibility of this benchmark comes after the base budget percentages have been set. Here, non-profits can customize their budgets by adding or subtracting percentage points to reflect their situation. For example, if there is a need for more resources, they will add percentage points to the base. Let’s say a charity in a small market has begun to face more local competition for donations. They could add 1% to the base budget to compensate for the competition. Likewise, if the organization has no competition or is facing a drop in competition, it could take 1% away from the budget.

The result of the subtraction and addition will be your final budget benchmark number. For example, if your final equation is 7% and your operating budget is $500,00, then the marketing and communications budget benchmark for the year will be $35,000.

The 3% Give or Take Budget Benchmark has limitations. First and foremost, it works better in small and medium-sized non-profits than in larger, better resourced organizations. This benchmark system is really designed for non-profit leaders who aren’t marketing and communications professionals.


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