How much should I spend on marketing?

Budget This is probably one of the most asked questions of marketing agencies and consultants.  If you google the phrase, there are almost 17 million results.  Guess it’s on peoples’ minds, eh?

I think one of the reasons why it’s on everyone’s mind is because there is no magic answer.  Before we get into the methods of determining a right answer, let’s be very clear about these two points:

The exact amount matters less than having an amount.  In other words, having and tracking a marketing budget, even if your initial number is off, is much more important than getting the number exactly right.

You can have the right budget and spend it on the wrong things.  A marketing plan should always be tied to a strategic marketing budget.

Now, let’s tackle the question.  Here are some of the more effective ways to set a marketing budget:

Percentage of gross sales/revenue:

This is probably the simplest method.  Most experts recommend somewhere in the range of 2-8% of gross sales.  McKinsey & Company is often quoted at 5%.

Most small businesses (less than $5 million gross revenue) should shoot for at least 7-8%.

Industry-specific:

Many industries have their own standard.  For example:

  • Consumer package goods:  Up to 50% of projected net sales to launch a new product
  • Industrial B-to-B:  1% of gross sales
  • Retail:  4-10% of net revenues
  • Banks/Credit Unions:  2-5% of assets
  • Law firms:  1-4% of gross revenues
  • Pharmaceuticals:  Up to 20% of net sales
  • Hospitals:  1% of net revenues

Lifetime value of customer:

The idea is simple.  You identify how much profit (on average) you make during the lifetime of that customer relationship and determine how much you are willing to invest per customer acquisition.  If you choose this method be very careful that your numbers are accurate.

Goals/Plan driven:

The thinking behind this method is really a blend of some of the others.  Identify measurable goals (# of new clients, % of revenue increase, etc) and then determine your sales equation.

For example:  For every 100 prospects approached, you get 25 initial meetings.  From those 25 meetings, you can expect to get 12 invitations to present a proposal.  From 12 proposals, you will score 4 new clients.  If your goal is 20 new clients, you now know that you need to approach 500 qualified prospects.  You build your marketing plan to accomplish that and assign the costs accordingly.

Again, this method requires very accurate numbers to make the equations viable.

So what do you think?  Which method do you currently use?  If you don’t have a marketing budget, which method do you think would serve you best?

kick it on Iowa Newz

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Comments

  1. says

    Roy H. Williams recommends you start with a basic percentage of your gross for occupation (rent) and a percentage for advertising, adjust them both by your markup, subtract the rent, and spend the remainder on advertising.

    This works for both retail and service businesses.

  2. says

    Chuck,

    Sorry — can you run that by me again. Maybe use numbers to illustrate? I’d love to update my post and add Roy’s idea. But I’m a little slow, so you have to paint me a picture!

    Drew

  3. says

    Drew, thanks so much for pointing to my blog. I just discovered your post today from a click-through. Great points you make! Wish you would have sent a trackback so my readers could find your post too. Wanna comment on my post and link over?

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  4. says

    Roy H. Williams recommends you start with a basic percentage of your gross for occupation (rent) and a percentage for advertising, adjust them both by your markup, subtract the rent, and spend the remainder on advertising.

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  6. says

    It is very difficult to decide on a marketing budget. We all agree one thing we need a healthy budget at the time of launching our products. without a healthy budget our product may not get noticed.
    Most marketing Gurus agree on your percentage ie 3 to 8percent,. Well some companies can afford to have more than 20 percent of there sales as a marketing budget.

  7. says

    I think that this question is answered with three “words”: ROI !
    But the follow problem is to measure the ROI. Anyway, nowadays SEO and SMO (Socia Media Optimization) is becoming a amazing way spend less in marketing with greater results.
    Thanks.

  8. says

    I am a marketeer and have been for the past 6 years..and I do agree that a marketing plan is very important..cause you can have a ton of money but if you spend it wrong…well it’s wasted money…but you have to have a certain amount to make it worth..there is a certain minimum amount under which investing is not justified..but that amount is deterement by the marketing plan you wish to go through…

  9. says

    I am looking forward for your next post. I found this informative and interesting blog. I just hope you could make another post related to this. This is definitely worth reading europe

  10. says

    This is really helpful for a struggling business or one just starting out. I had no idea there were amounts that were specific to an industry. I wonder where my quilting business would fall into?

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  12. says

    Thanks for these numbers, I am actually spending a lot more on marketing as I am starting out. Once established I will probably scale down a bit to probably around 2% of gross income.

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