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Posted by | March 21, 2011 | Blog | No Comments

 

How Much Should You Spend on Marketing? | motarme

Marketing budget - coins

How much should you spend on marketing?  There are a few ways you can get to the right answer. You can develop your answer using a mixture of a ‘top-down’ and ‘bottom-up’ approach.

First, why are you spending money on Marketing?

Companies spend money on marketing in the hope that it will increase sales. I use the word “hope”, because a lot of companies cannot show which parts of their marketing produces useful results.

And sometimes companies mention other goals like “branding” and “awareness”.

But if these other goals do not link clearly to increased sales then your marketing money is being wasted.

If you are confident that your marketing spend is helping to drive sales then it makes you think differently about the marketing budget. Rather than being a cost, it becomes an investment to help increase company revenue.

“Top down” – using industry benchmarks for marketing budgets

Now back to figuring out how much you should spend. Using a “top down” approach, you can look at industry averages as a guide.

For example, Deloitte’s 2022 CMO Survey found that marketing budgets were on average 10.4% of the total company revenues. But this varied by business type. B2B product companies averaged 9.4% of revenues spent on marketing, B2B services averaged 10%, B2C product averaged 14.2% and B2C services averaged 8.7%.  And most of the companies surveyed are pretty big. About 50% of them had revenues over $100M and 16% were in the $26m to $99m range.

In a previous Deloitte CMO survey from 2018, there were also variations in spending depending on industry. For example, Banking spent 7.8% of revenue on marketing, while Manufacturing spent an average of 2.38% and Technology spent an average of 9.7%

Gartner’s 2018 CMO Spend Survey found that marketing budgets were on average 11.2% of company revenue. Again, given Gartner’s clientele, these results represent the spend of mostly larger companies.

For a small business perspective, the US Small Business Administration quotes a report indicating average marketing spend was 7.9% of revenues. The same report found that B2B product companies spent 6.3% and B2B services companies spent 6.9% of revenues on marketing.

So you should be able to find a benchmark for your industry sector that gives you a ballpark idea of what your peers are spending.

But just because your peers spend, say, 7% of revenue on marketing, doesn’t mean you should spend the same percentage in your business.  Spending 7% of revenue on golf umbrellas and t-shirts won’t increase sales. So you also need to look at some “bottom up” figures.

“Bottom up” – using your understanding of your business and current capacity

Most of us are not starting from a blank sheet when planning our marketing spend. There has usually been some level of marketing going on in the past that we can use as a basis for planning. Can you analyze previous spend to get an idea of which expenditure produced new sales and new customers?

For example in a B2B company, can you do a rough calculation such as “last year we spent X thousand dollars to produce Y leads which in turn produced Z customers”? Do you have any data that indicates which marketing activities contributed to closed sales?

Ideally, you also want to understand your “cost of customer acquisition” – how much you have to spend to acquire each customer – and the “customer lifetime value” – how much each customer is worth to you on average.

Using a bottom-up approach you try to estimate the correct future marketing spend based on current results produced with your existing budget. For example, if spending $xxx,000 last year got me Y customers, will $xxx,000 plus a 30% increase get me a 30% increase in customers this year?

Some additional factors to consider for your Marketing Budget

There are some other factors to consider when you’re setting your marketing budget, including:

  • Life-stage of your company – if you are an early stage company trying to grow fast then you need to be prepared to spend disproportionately on marketing.  One extreme example is Salesforce, which in their first year of revenue-generating operations spent $25.4m on sales and marketing with revenues of $5.4m.
  • Profit margins – if company A has $100m in revenue and a 20% margin and company B has $100m in revenue but 2% margin, it makes sense that they may not both spend the same percentage of revenue on marketing.  Try to compare your company to peers who have both equivalent revenues and equivalent margins.
  • B2B versus B2C – spending in B2C marketing is different than in B2B. For example, consumer branding campaigns are potentially a big budget item in B2C but should not generally be a big element in a B2B marketing unit.
  • Available market – are you selling into a new market with lots of customers to acquire, or is it a mature market that is dominated by large incumbents?  If it’s a mature market, increased marketing spend won’t automatically lead to new customer acquisition.

Some specific stats for Software-as-a-Service Sales and Marketing

If you are a Software-as-a-service (SaaS) company you should look at what some other successful SaaS firms spend in their early years.  Check out this chart on sales and marketing spend by SaaS companies and a corresponding blog post by Tomasz Tunguz on the Redpoint venture capital blog:

Sales and Marketing Spend SaaS Tomasz Tunguz

So now you have a number, what next?

When you have defined a ballpark figure for your marketing budget, what should you spend it on?  Hosting a big party on a Caribbean island is a good answer but possibly not the correct one. 

Your choice of what you spend money on should be refined quarter by quarter.  If you find that $10,000 spent on online ads produces $100,000 worth of new business, then double that spend.  If you find that $10,000 spent on attending tradeshows produces no new business, then cut down on your tradeshow attendance.  

The main point is to understand which parts of your marketing spend are having an impact. Feed the campaigns that work, discontinue the ones that don’t.

Written by Michael White

Michael White is co-founder and CEO of Motarme, the Sales Technology and Services vendor. You can find him on LinkedIn .

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