Even seasoned marketers routinely wonder how their budget strategy stacks up against traditional averages and what they should spend. Our answer is always the same: “It depends”!
The first step in determining an appropriate budget is a change in mindset. Consistent, long-term marketing is NOT an expense. Rather, it’s an essential investment that pays dividends in the form of sales, income and market share. Marketing is a business asset that drives revenue.
Marketing as a percentage of gross revenue is a fast, easy way to set your spend. New and growth-oriented companies, especially those in highly competitive or emerging fields, must spend a higher percentage of their revenue to build awareness, educate prospects and drive sales. Established brands with known products and an existing customer base often get away with lower, maintenance-level spending.
Business analyst firm IDC reports that early-stage companies routinely spend 75-150% of their annual revenue on marketing during the first 2-3 years in business. Established brands spend 10-20%, while mature ‘cash cows’ can be milked spending just 5%. Inc. Magazine reports that almost half of the Inc. 500 spends between 10-20% of gross revenue on marketing. And online resource Marketing Profs states that growth-oriented companies invest between 9-18% annually.
A more sophisticated approach is to determine the marketing cost of each sale multiplied by the desired number of sales for the year. For example, if a widget costs $12 to market and your goal is to move 1m widgets this year, your marketing budget should be approximately $12 x 1,000,000, or $12m. This approach requires insightful projections or an accurate analysis of historical data to determine the cost of moving a widget. Shortchange the required investment and sales will fall – exponentially.
These are just two of the more common strategies used to set a marketing spend. Numerous variables affect this simplified perspective, and you must identify and account for them. It’s also critical to remember the important lesson the ‘dot-com’ bust taught overly optimistic investors: A company can outspend its available resources for a very limited time before economic reality sets in. Use these proven guidelines and your marketing spend will become an indispensable investment that generates demand and builds the bottom line.