You have to spend money to make money, so goes the age-old business adage. But how much money should you invest toward marketing? What’s the perfect investment that allows you to maximize ROI, grow your business, and yield healthy, sustainable profits? Bottom line: what percentage should you devote to your marketing budget?
Marketing budget as a percentage of revenue
There is no one-size-fits-all marketing budget, and there are various strategies for determining marketing spend – the vast majority of which calculate marketing budget as a percentage of gross revenue.
The Small Business Administration offers the following general guidelines for business with average margins between 10 and 12 percent:
- 2-3% for run-rate marketing
- 3-5% for startup marketing
- 7-8% for small business marketing (less than $5 million in annual revenue)
Most small businesses fall in the 7 to 8 percent range, but not everyone abides by this rule. Some small businesses allocate 20 to 30 percent of revenues for marketing, especially those in the retail startup phase or those with unique niches and clientele.
One of my clients, for example, sells high-end medical imaging equipment like MRI machines, which can sell for more than one million dollars. His firm spends a full 20 percent of its sales revenue on marketing, despite very healthy margins. The reason? They not only invest in traditional marketing, they go the extra mile to develop personal relationships with their clientele (hospital administrators), and often even treat customers to fully-funded trips in the interest of relation-ship building. For his company, marketing is expensive, but the return is immense.
Another example, to the other extreme: Walmart is said to spend just .4 percent (that’s four-tenths of one percent) of its revenue on marketing. That wouldn’t be near enough for most companies, but Walmart’s revenues are more than $482 billion – so just .4 percent amounts to nearly $2 billion.
Another problem: what if you have no revenue? Startups deal with this all the time. It’s difficult to predict revenues early in the game, especially when true profitability might be months or even years away. With limited funds – likely borrowed – it’s critical startups spend wisely and just as critical they invest enough in marketing to attract the customers who will sustain them and help them grow. Again, it depends on how much you have and how much revenue you project, but this is why you see some startups spending up to 20 or even 30 percent on marketing.
What do you need to spend your marketing budget on?
What you need to invest in plays a role in how much you should invest. Startups, for example, might incur an influx of initial fees for things like brand development, brochure design and printing, and web design. Medical imaging machine companies might have larger ongoing costs because they treat their customers to vacations. Retail companies might need larger budgets for mail-order catalog development and postage. You get the idea.
On the other hand, establish small businesses – especially consultants who primarily advertise via word-of-mouth – might only need to print business cards, which require a ridiculously low percentage of revenue.
So, how much should you devote to your marketing budget?
If you’re asking the question, chances are you haven’t been in business long. So, we’re going to assume you’re not sure how much you even need to spend on marketing for your business to survive. Here’s one strategy:
- Make a list of everything you need to spend your marketing budget on, then augment the list with things you’d like to spend it on
- Prioritize your list according to the ideas you know will be critical to your success and that have a good chance of succeeding
- Determine how much they’ll cost
This gives you a baseline – a true dollar amount representing how much you absolutely need to spend on marketing. Of course, if you spend more you’ll have more reach, more customers, and more profits. So:
- Figure out what percentage your baseline (your minimum spend) is of your revenues. If you don’t know your revenues, you’ll need to project them
- See how that percentage aligns with the SBA’s recommendations
- Now you can make some decisions
If you’re a small business and your baseline is, say, just five percent of your revenues, you might try to increase it to seven percent to see what impact it has on your bottom line. If you’re spending more than 30 percent of your revenues, you might need to evaluate your models model to try to identify inefficiencies.
Test, measure, and repeat
That brings us to the root of the issue. While no one can say for sure what the perfect marketing budget is for your business, if you start with a baseline minimum spend you can test different scenarios to see how they play out. If an increase in marketing investment results in an increased return, you’ll know.
Be sure to make any increases or decreases in small increments so you can accurately measure their impact. You also need to avoid overshooting your goal. For example, if you increase your investment by ten percent and lose money, you’ll never know if you would have made money by increasing your investment by five percent.
Finally, let it play out over time and make sure you consider other market factors that can cause revenues to fluctuate. You don’t want to miss making a good investment because something else led to a temporary drop in revenue.