Marketing is an integral part of every company’s business plan. Without marketing of some kind, sales don’t come in. That’s the reality. Marketing tactics, whether traditional or digital, increase your reach, connect you to your target audience, and drive sales. And that, of course, is what keeps you in business. Sales.
With that in mind, determining exactly how much to spend on marketing can be a challenge. It’s a conundrum that all businesses struggle with at one time or another. Luckily there are a few guidelines that hold across all industries that give you a starting point for creating your own marketing budget.
Industry Trends and Statistics
Marketing and advertising costs vary by industry. One industry could have vastly different marketing spends than another. For instance, Forbes.com notes that, “Throughout 2015, B2B [business-to-business] marketing budgets…increased to roughly 7 to 9 percent of overall company spending while B2C [business-to-consumer] budgets have stagnated around 9 percent…1 The reason for these differences can be very complex. Researching your own industry trends will give you a good starting point in determining how much to spend on marketing.
Longevity
The stage of life your business is in plays a big part in marketing budget planning. Again from Forbes.com: “Young enterprises, one to five years old, should be aggressive with their marketing tactics. Though these companies are often less profitable than older, more established firms, they rely much more heavily on brand reputation and recognition…”2 In other words, new businesses need to rely heavily on marketing and advertising in order to build a presence in the marketplace and let potential customers know of their product or service. Conversely, companies that already have a firmly established presence in the market can get away with spending a bit less.
Percentage of Revenue
Marketing budget dollars should be calculated as a percentage of either gross or projected revenue each quarter. If a company has been in business a number of years and has a solid revenue stream, calculating marketing costs as a percentage of gross revenue is the way to go. This will allow seasonality or any other regular historical spike or decline to be factored into the equation. If your company is newly formed and doesn’t have revenue history yet, then using projected revenue will work.
Entrepreneur.com offers this guideline: Companies that have been in business 1 – 5 years should be spending on average 12 to 20 percent of either gross or projected revenue. Companies that have been in business more than 5 years should be able to reduce that to between 6 and 12 percent of gross or projected revenue.3
Keep in mind that even after you’ve built your marketing budget, it won’t be set in stone. Marketing budgets are fluid; they can be impacted by industry trends, seasonality, economic indicators, or natural disasters. They’re also impacted by business goals. If you’re trying to aggressively grow the business, or you experience a sudden need for additional cash, you may need to deviate from the original budget to account for this. Keep it as flexible as possible while still maintaining a budget that fits within your overall business plan.
Investing During Lean Times
There are times when the economy takes a downturn, consumers get nervous, and sales dip. Often marketing dollars are the first to get cut when revenue is down. This is a dangerous tactic. Cutting marketing dollars during lean times starts a downward spiral that’s difficult to recover from. Less presence in the marketplace means less brand awareness, which can then lead to even fewer sales. Resist the temptation to cut marketing budgets when sales take a dip. You’ll weather the storm much better if you maintain your level of spending.
References:
- Forbes.com: https://www.forbes.com/sites/steveolenski/2015/12/21/a-practical-guide-to-determining-your-perfect-marketing-budget/#14b7fc8a360d
- Forbes.com: https://www.forbes.com/sites/steveolenski/2015/12/21/a-practical-guide-to-determining-your-perfect-marketing-budget/#14b7fc8a360d
- Entrepreneur: https://www.entrepreneur.com/article/243790
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