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.
“Top down” – using industry benchmarks for marketing budgets
Using this approach, you look at industry averages as a guide. For example, MarketingSherpa produce an annual Technology Marketing Benchmark Survey for B2B marketers. In the 2008 survey, the average share of revenue spent on marketing by technology organisations of between 100 and 1000 employees was 7.9%. IDC also produce an annual Marketing Investment Planner and in 2007 reported the average share of revenue spent on marketing by 95 large technology firms was 3%, with software vendors spending 5.5%. A 2006 report by Blackfriars found B2B companies planned to spend 4.3% of revenue on marketing compared to 6.8% for B2C firms. There’s also a good post at https://www.imageworksstudio.com/client-lounge/articles-tips/setting-a-marketing-advertising-budget.html which quotes the US Small Business Administration as defining the correct percentage to be between 2% and 10% of sales. The Small Business Administration also pointed out that B2C, retail and pharmaceuticals marketing spend can exceed 20% during peak brand-building years.
So you should be able to find a benchmark for your industry sector that gives you a ballpark indication of what your peers are spending.
But just because your peers spend, say, 5% of revenue on marketing, doesn’t mean you should spend the same percentage in your business. Spending 5% of revenue on golf umbrellas and t-shirts won’t deliver you an increase in customers. 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 analyse 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 did or did not contribute to closed sales? Ideally, you would like 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 spend based on current results produced with your existing budget. If spending $xxx,000 got me Y customers, will $xxx,000 plus a 30% increase get me a 30% increase in customers?
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 aggressively 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:
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? Holding a massive 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. I’ll come back to marketing budget allocation at some point in the future because it touches on a lot of areas, including marketing processes, conversion rates, analytics, marketing attribution and more.