How Much Should I Spend on Marketing?
Fall is rapidly descending on the US, and the summer is winding down, especially in Alaska. As we all prepare to settle back into the fall routines for many of us business owners, that means it will soon be time to start planning for next year. One of the main things that should always be part of planning for the next year is budgeting, where are you going to spend your hard earned money. Where is the money going to benefit your company the most? Many Alaskans are facing uncertainty and recession like environments in their industries. Therefore, where the money goes becomes even more important. Sadly, it is common for businesses facing hard times to consider cutting their marketing budget, while this is the worst thing you can do. Marketing keeps the flow of clients steady, which in turn keeps much-needed cash flowing through your business.
How Much of Your Revenue Should Go to Marketing?
Traditionally the rule of thumb is that your marketing budget should be between 5-10% of your total revenue. According to recent surveys of businesses across the US, we can see that companies are now allocating on average between 7-12% of the total revenue for marketing. Those who are wanting to increase their market-share, especially during slow times, are usually on the higher end of those averages while companies that are more focused on moderate growth or maintaining their current market share are falling on the lower end.
Interestingly enough, the businesses under $25 million a year in revenue tend to spend more on marketing, usually in the range of 10% or more of their total revenue. The type of business you are in can also affect how much you invest in your marketing. For example, a recent CMO Study found that business to business firms (B2B) typically spent about 7-8% of their total revenue on marketing while business to consumer companies (B2C) averaged 9% of their revenue on marketing.
One quick item I want to point about these numbers is that the 7-12% listed includes marketing staff salaries, marketing agency fees, and direct marketing costs. Some companies manage all of their marketing in-house and only have salaries and direct marketing costs. Other companies leverage marketing agencies, which means they have the fees associated with the agency and the direct marketing costs. Still, other businesses have found that a hybrid of the two is the most effective. They will have in-house people as well as an agency and the direct costs. Direct costs include pay per click fees, Facebook fees for promoted posts and ads, Google AdWords, digital ads, TV and radio air time purchases, and printed advertising costs.
Where Should I Spend my Marketing Budget?
The answer to this question is going to vary based on your goals and your marketing budget. First off, take a look at the chart below. Based on historical data and current trends, eMarkeeter is predicting that in 2017, spending on digital advertising will surpass TV for the first time! We’ve been rapidly approaching this tipping point as TV marketing consistently loses effectiveness and people increasingly turn to digital. Likewise, the disruption of the digital world is eating away at the print advertising world. HubSpot consistently reports that inbound marketing (also called digital or content marketing) costs 62% less per lead than traditional advertising. This means that while TV may still be getting over a 1/3 of the marketing budget, it is significantly less effective than the 38.4% of the budget being spent on digital advertising.
If you are considered a “mid-sized” company, which means you have revenue of $10+ million, then your marketing budget is going to be larger, and you can afford to spend money on TV advertising, even if it the return on investment isn’t as good as digital marketing. If you are a small business with revenue between $750,000 to several million or a micro-business with revenue under $750,000, then I would strongly advise you focus on digital marketing due to its much higher return on investment.
Now those revenue numbers are my own and not based on information from the Small Business Administration (SBA) because but the hard thing is that no one can agree on what is a small business, a mid-sized business, and big business. Plus there is the emerging term of “micro-business” now. According to a recent US Census survey, businesses with nine employees or less make up 95% of the “small-business” classification. Additionally, the solo-entrepreneurs and freelancers (so called micro-businesses) make up 78% of all businesses in the US! Yet the SBA says a “small-business” can have up to 199 employees and revenue of $25 million. Those of us in the 95% know we have different marketing needs and entirely different structures than companies with almost 200 employees.
Okay, enough of the rant, the bottom line is that you need to have a marketing budget and it must contain digital advertising pieces. Traditional advertising methods of print, radio, and TV have a rapidly dwindling place in a marketing plan. An effective marketing budget does not have to be hundreds of thousands of dollars. Take a good look at your revenue, commit to spending at least 7% of it on marketing and check out our blog What Should Your Marketing Plan Include for tips on what to spend your money on. Take a good look at your local digital marketing experts, get competitive quotes, and figure out the company that is going to help you reach your goals and you’ll enjoy working with.