I’ll get the straightforward answer out of the way; it depends.
There are figures out there such as the 5% rule which states you should spend 2-5% of your budget on marketing. Other figures including recommendations from the U.S. Small Business Administration put the percentage at 10-12% if you’re doing less than $5 million a year in sales.
But the truth is, it’s not that simple.
The reason for this: your marketing budget depends upon several factors which differ from business to business.
Let’s look at a few of the determining factors:
1. Company Stage
New companies, unless flush with outside investing, don’t have the money to spend a lot of money on marketing. And yet, they should be spending more as a percentage of revenues to generate brand awareness.
Developed companies with steady cash flow and established growth likely have the money to invest in marketing activities but may not need to. They may already own a significant portion of the market share and don’t need to spend as much to stay ahead of the competition
2. Profit Margin
If you’re selling a low margin product and you have your budget tied up with manufacturing, operations, human resources, and research and development, you may not have as much money to dedicate to marketing. That said, it may be time to explore raising prices to a) add more value in your offering and b) invest in marketing the product/service.
3. Industry
Some industries require a lot of marketing to move the needle due to existing competition and what they are spending. Imagine trying to introduce a new soda to take on Coca Cola and Pepsi. It’s going to take a lot of advertising to make any kind of dent in that market.
Ultimately, I think the biggest problem is with the question itself. There isn’t a magic number or percentage of your budget to apply towards building your brand. Some companies spend a lot less and are more successful than their competitors. Asking “How Much Should I Spend on Marketing?” is akin to asking, how little should I spend to try and get this product or service off the ground.
You should be asking a very different question about what you spend on marketing. You can spend as much or as little as you want so long as you continuously question, “Is my marketing working?”
Too many companies throw their marketing ideas up on a wall in the marketplace to see what sticks, and then never actually quantify the effectiveness of their campaigns and initiatives. Then they roll over their expenditures over to the next year and add on new ideas, never asking “Is it working?”
How do we know this? Because almost every marketer has found herself or himself sticking something in the marketing plan because the competition does it. Or because it was on the books for last year and one person on the team has a gut feeling it’s doing something.
Some forms of marketing are inherently difficult to quantify. How can you tell if your print advertising is creating awareness or changing perception? (The answer is a lot of marketing research, something else to add to your budgetary considerations). What is the real effect of event marketing when people walk by your booth but don’t engage?
Ultimately, the most important thing you can do, is looking at each piece of your marketing plan and ask, “What was the real effectiveness of this activity?” If you don’t know, then set a metric for it. Force yourself to find ways to quantify success based on engagement or leads generated or best of all, the actual return on marketing investment (ROMI). Perform market research to gauge how impactful your marketing is. With offline advertising, try and force people to make a trackable action. Ask them to call a different number you can track separately. Send them to a vanity URL instead of the homepage of your website.
Then sit down and look at the figures and ask yourself, “Is it working?”
If the answer is no, then make changes to the messaging, targeting, etc. and try it again. Or take it off your plan and replace it with something else. If the answer is yes, then figure out if you can do more of it in different markets or with a different promotion/product/service.
So long as your marketing is generating a return and you’re managing the other aspects of your business wisely (including cash flow and deliverability of your product/service), you can continue to invest in marketing activities that work.
Stop asking how much you should be spending on marketing. Start asking “How much can I spend on activities that are creating results?”
