Whenever we meet with new clients, one of the first questions they always ask is how much they should be spending on their marketing. It's a simple question, but the answer is complicated as it depends on a few factors such as what your goals are, what your brand history is, what types of customers you are trying to reach, and how much you've been paying to acquire new customers or leads to date.
Here are some of the important questions you should be asking yourself when you're trying to figure out how much you should be spending on marketing. We'll also break down the answers to each using existing thinking and research on the topic.
What Are Your Goals?
If you want to build your brand and grow your business, you should plan on spending at least 10% or more of your revenues on marketing. This might come as a shock to many people, as it usually does for clients we talk to that are spending around 1% of revenues on marketing. I'm here to tell you that, from my experience, 1% of revenues for most small to medium-sized businesses is not enough to even maintain your brand, let alone increase revenue. Let's say you're doing $3 million in sales annually, that would mean you're spending only $30,000 or just over $2,000 a month on your marketing. It's hard to see how you can afford a mix of different marketing activities (and not all of them are free) on a budget that small and expect there to be any growth.
Research suggests that if you're going to build your brand or business, you need to spend much more than 10%... perhaps even as much as 20% on marketing. The reason for this is that you need to invest in building familiarity and trust with your brand. One of the best ways you can do this is by putting out helpful content (the core of content marketing) and quality content takes time and effort to produce. Once that's done, you need to share your content, engage with people and work hard to establish a connection with your target customers. Doing this at scale is extremely difficult and people will often need an agency or external resources to do this.
Need more info? Here's a great article from Entrepreneur that breaks down some costs that you can use to get a sense of what things cost. Here's a handy marketing budget calculator from WebStrategies.
Who Are Your Target Customers?
If you're a B2C company, you can take a look at the consumer packaged goods (CPG) industry which spends just under 20% of total revenues on marketing, more if they are looking to launch a new brand or grow an existing one. The consumer space is space is often dominated by larger, established brands that have budgets to spend on differentiating their brand. If you're product is truly unique and your positioning is proven, you might be able to get away with spending less, but you're going to have to be smart about where you're putting your money. It goes without saying that tracking conversions and optimizing what you spend on a continuous basis is the only way to go.
Marketing spend as a percentage of revenue tends to be smaller on the B2B side of things, hovering in the 5 to 6% of revenues. I'm not entirely sure why B2B budgets track as a lower percentage of revenue but I'd guess it's because they also carry sizeable sales departments and budget has to be allocated there as well. It could also be that B2B marketers are getting higher prices than B2C marketers while getting lower cost per customer so they are able to have a lower revenue/marketing budget percentage.
How Much Do Leads or Customers Cost You Now?
At Cyan, if we find that a prospective client might have expectations for their marketing goals that aren't in line with the reality of their business performance to date, we will take them through an exercise to figure out how much they are currently paying for leads (and customers) and then compare that against their goal for revenue growth.
The basics of this analysis is actually pretty simple. You figure out how much it costs to generate a lead and a customer, and then multiply that by the number of customers you need to acquire to reach your business growth goal. From there, you'll figure out how much additional budget you need to invest. Sure, you can generate efficiencies and lower your cost per lead or cost per customer as you optimize your strategy going forward, but if you think you're going to increase sales by 20% or 25% without investing any additional marketing budget, you might need to adjust your expectations.
Figuring out what your marketing budget is going to be can be difficult. Of course, any agency is going to say that you need to spend more but I hope that this post has provided you with some additional insight into what others are saying on the topic.
Regardless, it's fair to say that 1% or 2% of revenues doesn't really leave you with much, especially if you have to build and maintain a brand. If you have any questions about marketing budgets, feel free to get in touch and we can schedule a free consultation.