Are You Sustainable? What Percent of Revenue Should You Spend on Marketing?
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What drives revenue in a business? Many would think it is the sales or their business strategy. On the contrary, marketing is the fuel behind any business’ success. It is through marketing that a business makes enough “noise” to draw the attention of would-be buyers. In this case, it is one aspect of any enterprise, whether small or large, a startup or established, that should be looked at keenly. What’s more, when spending on marketing, a business should not look at this as an expenditure but investment. With that said, how much revenue should you plow back into marketing?
A study conducted by CMO Survey, as reported by Duke University and American Marketing Association in 2014, came up with the following estimates of the average percentage of gross revenue spent by different companies on marketing. According to the report:
- B2B Product Businesses allocated 10.6% of their revenue to marketing
- B2B Service Businesses were using about 10.1% of revenue in marketing
- B2C Product Businesses deployed an average of 16.3% annual gross revenue in marketing, while
- B2C Service Businesses used approximately 10.9% of revenue for marketing activities.
Looking at the above figures, it could be convenient to conclude that at least 10% of gross revenue should be spent on marketing. However, every business is unique and may require a different figure. For this reason, in order to help you figure out the portion of your capital you should set aside for marketing, we’ve put together 5 most important questions you should ask yourself when setting up the budget for your marketing activities.
1. What is my annual revenue?
Basically, the amount of money you spend on marketing should be a portion of your revenue. It is common to decide on a certain percentage of the net revenue that will go into marketing. For instance, if your business gains annual returns of USD300, 000, you could decide to use 11% of this money for marketing in the following year. Of course, the chosen percentage will depend on other factors, as you will find out below.
For startups, it could be wise to reevaluate your returns after a short interval, such as quarterly or monthly. This is true too for businesses whose revenue fluctuates greatly. Frequent evaluation enables you to see what’s working or not working so that you can change the strategy in good time.
Since a new business doesn’t have any returns yet, budget allocation for marketing will be determined by the projected revenue. Do your market research properly and use the projected figures to come up with a suitable budget for your marketing activities.
2. What are my marketing activities?
This is a break-down of the different aspects of marketing you want to spend your money on. Depending on the nature of your business, you will need to find out the best methods for promoting your products. When allocating the budget, give priority to those marketing activities that have higher chances of giving you great success in your niche.
3. What stage is my business at?
Businesses go through different development life cycles. Depending on the stage your business is at, it will call for different input in terms of marketing effort and budget in order to gain desired results. When deciding how much you should spend on marketing, look at the growth stage your enterprise is experiencing. For instance:
- A startup: for a new business, percentages of up to 35% of projected revenue are viable depending on the competition in the market. You have to put more capital in marketing to gain momentum in your niche. This is actually part of investment.
- An existing business: once your business has been in the field for a while and doing well, you may find that you need minimal effort (compared to startups) to keep it afloat. Of course, you cannot ditch marketing for good. This makes it useful to set a budget of at least 10% of the annual revenue for marketing.
- Existing businesses launching a product: When there is a new product in the picture, the best strategy is to treat your marketing strategy for this product as though you were promoting a new business. In this case, you’ll need to boost your budget to a value higher than the existing budget. Choose the value depending on the competition your new product is likely to face.
4. What is the state of my firm?
One might own a business that is stagnant or going down the drains. In such a situation, a lot of capital should be channeled to marketing to help the business back to its feet. Clearly, your existing marketing budget isn’t giving you the desired results. A good idea would be to boost your budget by a slight percentage and watch the results. But I am already making losses, you may ask! Instead of cutting your marketing budget, look at other luxuries you may have been enjoying and adjust. Review after every 3-6 months to determine your next cause of action.
5. What industry am I in?
Some industries are more competitive than others. This will influence the percentage of resources your business has to put into marketing to get the desired sales turnover. For instance, many of SaaS businesses are plowing upto 53% of their revenue into marketing. Such may not be practical for businesses in the manufacturing or technology sectors.
Like you have seen above, there isn’t cast in stone percentage for a marketing budget. This is because various companies have different marketing needs during different life cycles of their business. How to be sure if you’re spending enough or too much? A good marketing budget will give you the desired results without hurting liquidity.