What’s the Optimal Marketing Budget?
Most companies grapple with how much to invest in marketing. What percentage of their revenues should they spend? Under the umbrella of “marketing” we include branding, advertising, public relations and social media.
Most small to medium-sized companies tend to under-invest in marketing, taking the view that not spending is saving. But this is no truer than assuming that cutting down on salespeople will grow business. Chances are, under-spending on marketing won’t save money. Quite the contrary, investing in marketing will have a positive impact on the growth track of a company. How much a company invests in marketing usually dictates how quickly they will grow.
So how much should your company invest in marketing? What is the right percentage or figure?
The answer depends greatly on the size, type and financial state of the company. According to the results of the CMO Survey February 2015 Report, which received survey responses from 288 top U.S. marketers at Fortune 1000, Forbes Top 200 and other top marketers, companies planned to increase their 2015 marketing budget by an average of 8.7% in 2016. With such a sizeable increase, it’s evident that marketers are bullish on our economy and the timing to invest in marketing.
Marketing Investment by Percentage of Revenues
According to the CMO Survey, in 2015 companies spent on average 8.3% of their revenues on marketing, with the percentages varying by type of offering, as follows:
Type of Offering Percentage of Revenues
B2B Service 8.6%
B2B Product 7.4%
B2C Service 9.3%
B2C Product 9.1%
The study found that smaller companies invest more in marketing than do their larger competitors, as they seek to establish themselves and increase market share.
Sales Revenues Percentage of Revenues
<$25 million 11.1%
$26-$99 million 6.9%
$100-$499 million 4.5%
The U.S. Small Business Administration recommends that companies earning less than $5 million in sales with net profit margins in the 10-12 percent range invest 7-8 percent of their gross revenue in marketing and advertising.
But not every new company fits that profile. Others recommend that companies that have been established 1-5 years invest 10-20 percent of their gross or projected revenue in marketing.
And what about start-ups with minimal revenue? The investment in marketing will be greatly dependent on management’s appetite for growth and available funds. Getting adequate funding upfront is critical to the successful launch of a business.
Doing It Right
We often find that small to medium-sized companies in particular try to scrimp on marketing. It’s a costly mistake. Those companies opt for cheaper options and end up with a website, logo or brochure that needs to be recreated six months later. Their public relations outreach is minimal, and their social media looks like it was done by an intern.
Good marketing need not be expensive, but it is not cheap. The biggest mistake companies can make is to under-invest in their marketing, leaving them wondering why their sales growth has been so slow, why their competitors are stealing market share, or why they have gone out of business.
Now I invite you to think of companies that have quickly risen to the top in our industry. Did you notice one thing in common among them all? They marketed themselves heavily. Very heavily. They utilized marketing, public relations and social media to the fullest extent—and it paid off big.
The Moral of the Story
At the end of the day, scrimping on marketing is no less risky than scrimping on sales. Is the $200,000 marketing budget that yields $2 million in business better than the $30,000 marketing budget that yields $300,000 in business? You bet it is. So before you are penny wise and pound foolish, think of how much you want your company to grow, and plan accordingly.