I’ve been getting a number of inquiries about how companies should determine an effective marketing research budget. At the outset, know there are many factors involved in this imprecise exercise with not the least being company tolerance for risk.
Some smaller companies with $10 to $20 million in sales will spend $250,000 or more on focus group, image, customer satisfaction and new product development studies. They tend to be companies that are intent on optimizing the chances of success and/or reducing the risks of failure as much as possible. Then there are $100 million companies that reluctantly squeeze out $50 or $60 thousand for a now and again study to address a specific problem that might arise.
Every company has a certain research culture. For some, research holds a pivotal role in the how marketing decisions are made. For others, research is regarded as an unreliable indicator of success and held in relatively low esteem. Whatever your company culture, at one time or another you may have wrestled with how much is reasonable to be spending on marketing research. If so, here are seven alternative approaches that have worked for various sizes and types of companies.
1. Allocating a percentage for research out of the overall marketing budget. If a company spends $50 million on marketing programs, anywhere from .5% ($250,000) to 5% ($2,500,000) might be allocated to research. In the case of companies such as Kraft or General Foods, where there are many different brands, research is generally allotted per brand using the above percentage ranges.
2. Allocating a percentage of the advertising budget. Sometimes the advertising budget alone is used in allocating research funds. If a company spends $10 million on advertising, the same percentages as above are used to allocate research dollars.
3. Allocating a percentage of sales. Some companies, particularly industrial or manufacturing companies that don’t have substantial marketing or advertising budgets, often allocate research as a percentage of sales. Anywhere from .5% to 1% is typical.
4. Assessing needs. A popular method to determine research allocation is to list the projects that should be undertaken in the coming year and assign dollar figures to each project. An initial list is usually reviewed by those who will use the research results. This could be any number of people in the company, or perhaps the company’s vendors might lend their expertise. From this collaborative review, projects are added that are believed necessary or eliminated where felt unnecessary.
5. Ad hoc. The bane of a researcher’s existence is the need to convince the holder of the budget to allocate funds ad hoc each and every time a research issue surfaces.
In such instances, there may be a research budget that is allocated, but the researcher is constantly forced to justify the use of the funds. This isn’t necessarily bad, as it forces the researcher to consider whether the research is really needed and whether the cost will produce actionable results.
The problem with ad hoc research budgeting is that it doesn’t provide a strong strategic-thinking focus regarding forward-thinking issues that need to be addressed to grow the company or brand. When conducting ad hoc research, issues that surface tend to be tactical in nature and responsive to immediate problems and, therefore, low-impact decision making.
6. Some combination of the above. Often, a firm research budget is agreed upon that will accommodate a number of strategic and tactical studies for the coming year. Additionally, there is an ad hoc “slush fund” that is available when unexpected issues arise throughout the year and research is indicated.
7. No research budget at all. Akin to ad hoc budgeting, many companies don’t allocate a research budget at all. In such cases, the budget might be in the hands of the president, director of marketing, brand, product or advertising management. Research is then undertaken only when management feels the need is particularly strong.
Whichever budgeting process is used, it is important that a degree of flexibility exist. No one can predict with complete certainty whether every research project that might be planned in a November budgeting process will be necessary the following June.
Likewise, many priority issues surface throughout the year that cannot be anticipated. What is ultimately important in research budgeting is that a commitment be made to improve decision-making by spending research dollars. It is, then, incumbent upon the company to decide which budgeting process is the best to follow to that end.