How Much Should Companies Budget for Marketing?
02.01.2011 / Posted in Articles, Budget, Strategy
Businesses commonly ask how much they should budget for marketing each year. Unfortunately, there’s no easy answer.
Yes, there are rules of thumb, but there are also numerous attenuating factors for each company to consider. The amount a business should budget varies based on its tenure in the marketplace (and if it has multiple products, it may have to allocate its marketing spend differently based on each product’s market status) and its industry, among other considerations. For example, industrial, business-to-business corporations may spend less than 1 percent of their net revenue (total sales) on marketing established products, yet many consumer products companies spend 50 percent or more of their net revenue on launching new offerings.
Marketing spend also depends on how much and how quickly you want to grow. The old adage is true: You have to spend money to make money.
Rules of Thumb
As a general rule of thumb, companies should spend around 5 percent of their total revenue on marketing to maintain their current position. Companies looking to grow or gain greater market share should budget a higher percentage—usually around 10 percent.
This percentage, of course, will vary by company and industry. For example, companies in highly competitive industries—such as retail, consumer products, and pharmaceuticals—often spend 20 to 50 percent of their net revenue on marketing.
Using the general rules of thumb, calculate your company’s ideal marketing budget below:
- Total Revenue x 5% = Marketing budget required to maintain current awareness and visibility
- Total Revenue x 10% = Marketing budget required to grow and gain market share
Caveat: These rules of thumb are based on businesses that average at least six-figure revenue numbers. Companies with smaller margins should allocate a percentage of their net revenue based on estimates of what competitors are spending. (And yes, they will have to guesstimate roughly at best. Competitors rarely share that information openly.)
These numbers will be out of the comfort zone for a number of businesses. Keep in mind that the total budget calculated by these rules of thumb covers all marketing expenses: The cost of marketing staff and their overhead as well as the cost of printing, advertising, and outsourced talent is included.
Many businesses have failed because they were unwilling to properly budget for marketing activity. Companies can grow to a certain point via word of mouth, but after they hit a certain size threshold, they will stall.
Additional factors to consider when developing a marketing budget include new product/service launches, new market entries, and mergers and acquisitions. The percent-of-revenue calculation should be adjusted to account for these factors.
For example, businesses on average should spend 10 percent of their gross sales for the year on marketing each new product or service, or 20 percent of the new service’s sales and revenue target. And consumer products and services companies should always spend a higher percentage than business-to-business companies.
Companies may wonder how much they can expect to receive in return for their marketing investment, and how much an increased investment will garner them in increased return.
It’s a fair question. Yet again, there’s no easy answer. Some marketing tactics require a longer term than others for effective return. A marketing strategy focused on branding, for example, will need a longer period to see results than a lead-generation strategy. In general, most marketing activity snowballs over time, delivering exponentially increasing return the longer the tactics are underway in a coordinated, diversified fashion that covers the right audiences with the right messages.
Marketing should not push forward without success measures. Metrics should consider the marketing strategy—which hopefully aligns with the business strategy—and the different tactics involved in carrying it out. Measures can be global, across multiple tactics, and specific to each tactic. Yet a company should depend heavily on its marketing strategy and the tactics it employs to execute its strategy in defining all success metrics. (For more information about developing effective marketing metrics, read our white paper on measurement.)
For additional background and perspectives on developing marketing budgets, read the articles below:
FrogDog can help you establish a realistic budget and put you on the path for success with a marketing strategy. Give us a call!