How much should you spend on marketing?

6 min read

We put our heads together

When it comes to the question of how much to spend on marketing, you might expect us (given the “marketing” in our name) to come back with something snappy like: “How much have you got?” The thing is, there’s no one number. There aren’t even two numbers. We should be clear about that up front.

But it is an important question, and while we’re not without some bias, we can at least point you in the right direction. We’re people who live every day with this stuff; we make it, put it out, keep track of the data, adjust it, and reevaluate it. We obviously think that marketing matters a lot (in an analogy where an organization is the body, after all, marketing is not just the face, it’s also all the parts that make up the face: the eyes, the ears, the voice). We’re also well positioned to judge what constitutes a common sense approach. You don’t need radical plastic surgery every year, but you like to appear friendly and relevant, right?

More important, you want the maximum return on good ideas. Because next to spending a lot of money on a bad idea, the most foolish move you can make in your marketing is to spend too little on a great one. You could have the smartest, most effective campaign in the world, but if nobody sees it, it doesn’t matter.

Know Your Market

If you’re a well-established, high-volume business, and a leader in your sector (say Walmart), maybe you can afford to not worry about this. Although you may occasionally want them to think of you differently, potential customers already know who, what, and where you are; plus, your high-volume business model means that the impact of your marketing gets multiplied across a lot more sales.

But most companies aren’t the Walmart of their industries. A higher-margin, lower-volume business with strong competition for the same customers needs to spend more. And this amount, says Bloomberg Business, is dependent upon your industry (automakers? 2.5-3.5% of sales; liquor? 5.5-7.5%; packaged goods? 4-7%) as well as how much your competitors are spending. If they all happen to be public companies, you may be able to dig their overall budgets out of their annual reports.

But even if they’re not, there are a number of tools you can use to keep tabs on their marketing, especially what they are doing digitally. Make sure you’re getting updates from their email list, blogs, and social media, too. You may not get a hard number, but to know exactly what your competitors are doing may be at least as important as knowing how much they’re spending on it.

Find Your Ballpark

If you’re looking for a benchmark percentage to start with, there seems to be some consensus around the neighborhood of 5 to 10% of projected sales (with the lower figure sufficing to hold position and the upper to make gains). According to the U.S. Small Business Administration, businesses with revenues less than $5 million should allocate between 7-8% of revenue to marketing, assuming your margins, after expenses, are in the range of 10-12%.

If your margins are narrower, you may want to lower overall margins in order to allocate additional money for marketing. As the SBA points out, your marketing budget shouldn’t be based on your expense leftovers. On that note, remember that when we talk about sales and revenues, we’re talking about projected figures, not last year’s, because your spending should be pegged to the performance you hope for in the future, not past performance.

If you are a new company, or are introducing new products, even 10% could be too low. Again according to the U.S. Small Business Administration, retail businesses in the early brand-building phase sometimes spend as much as 20% of sales on their marketing. These early-year expenditures can justifiably be thought of as an investment. You’re building a foundation.

Once you’re established, your marketing expenditures may lessen. But your decisions about spending are still weighty ones. As Daniel Kehrer of MarketShare points out, marketing is accounted as a profit and loss item, not as part of the balance sheet. Rather than use an ROI ratio to guide you, he recommends return on marginal investment (or ROMI) if you really want to base your decisions on returns.

Keep Track of Results

But here’s what’s key, according to Kehrer: Keep track of the revenue you actually produce, and where it all comes from.

This is where analytics 2.0 comes in. You’ve always wanted to keep track of what your marketing spending is getting you. Thanks to Big Data, you can now follow it with unprecedented complexity and precision. Cross-channel analytics let you know which channels are working as well as how they may be working with one another. Take advantage of this, because it means that unlike that famous adage about advertising expenditures (in which half the money you spend on advertising is wasted, but you don’t know which half), you actually may be able to home in on the sweet spot that gets you closer to 100%.

Your customers aren’t just putting down the TV remote and rushing right out to the store. Maybe they get online first, check out your website. Maybe after that, they read some reviews. They click on a few digital ads. You send them an email. Maybe they delete it. You send them another one. Maybe they open it. Finally, they make the purchase. Or maybe it doesn’t even start with a TV. Maybe more successful customer journeys for this product begin with a YouTube ad. You now have access to the tools and the technology to take some of the maybes out of these scenarios.

Corey Craig heads customer experience design and innovation at Dell. She describes, in this article for VentureBeat, how Dell maps customer journeys in order to achieve three times their old average order value (AOV). Dell’s process first identifies customer intent, nurtures that intent with targeted content, then automates reactions. They’ve raised their email open rate from 12 to 30%, and their click-through-rate from 1 to 6%. It’s not necessarily about what they spend, but what they’re spending on.

Still Looking for That Number?

We know, we know. No matter how you’re making decisions, every company is always going to end up with “a number.” Whatever that is, you will probably question whether it’s too high or too low. A recent report from Forrester suggests that the average company now spends 11% of its revenue on marketing, which, last time we checked, was not in the 5 to 10% range.

But making your decisions based on an average should be your very last resort. And definitely don’t base your spending decisions on general trends. While spending on marketing may be up overall, even in the nonprofit sector, you should base your decisions on factors specific to your own market.

Who are the new customers you want to reach? What’s the best way to reach them? How are you going to tell how you’re doing? The more you base your spending on trustworthy info and definite goals, the better off you’ll be. Will you be able to keep using the same numbers? No. You’ll have to continually reassess. The upside is, so will your competitors, if they want to come close to keeping up.

And if you need some extra heads on the problem, let us know. We’ve got more than a few to spare around here.