Many company leaders tend to view a marketing budget as a discretionary item, liable to cuts as needed. However, such a viewpoint is ultimately self-defeating. The reality is that a marketing budget is an investment that can yield rich dividends in the near future and in the long term.
There are many factors that inform the size of a given business' marketing budget ratio. While arriving at a definite dollar amount is important, it makes sense to look at the needs of your business, the unique attributes of your industry, and the potential ROI that a healthy budget could yield.
How to Determine the Optimal Marketing Budget Ratio
Your marketing budget can be expressed as a percentage, or ratio, of your total revenue. In other words, it is your marketing investment divided by total revenue. Your marketing budget ratio may range anywhere from 1% to 10% or more of sales, depending on your business goals and objectives. Much of this variance is also due to the intrinsic differences between industries.
For example, the U.S. Small Business Administration reports that in 2018 the average marketing spend for B2B and B2C companies was:
- 6.3% of revenue for B2B product companies
- 6.9% for B2B service companies
- 9.6% for B2C product companies
- 11.8% for B2C service companies
For small businesses (companies that earn less than $5 million in revenue), the SBA advises a marketing budget ratio of between 7-8%. For larger companies, the target range may fall between 10-12%. Of course, these are just averages and do not take unique business characteristics into account. For instance, startups that cater to high value demographics may need to spend 15% of their budget or more on marketing to build up their consumer base, whereas more established companies may be able to reduce their spend while maintaining their current revenue streams.
Moreover, specific marketing goals play a key role in determining the amount of budgetary resources to allocate to advertising initiatives. As an example, a company that wants to obtain 200 more leads in a month's time cannot invest in only enough marketing to capture 100 leads. In this scenario the old adage holds true: "You get what you pay for."
Any marketing goal should conform to the SMART methodology in order to yield the best results. The goal should be:
- Attainable (or Achievable)
- Time-oriented (or Timed)
Of course, small goals require small investments, and larger goals require proportionally larger spend amounts.
Calculating Your Budget Ratio
Once you have a clear idea of which business objectives you want to achieve, you'll need to crunch the numbers and arrive at some definite spend parameters for your marketing budget. While many corporations simply allocate a set percentage of their revenue to marketing and leave it at that, it is more effective to incorporate costs into your calculation from the outset.
Many executives have found the following formulas helpful: P1 x M - C and P2 x M - C, where P1 is your minimum target ratio (for example, 10% of sales), P2 is your maximum target ratio (12% of sales), M is your gross markup, and C represents operational costs. Keeping your marketing budget within realistic minimum and maximum thresholds ensures that your advertising efforts will stay robust without draining other important resources such as inventory management, payroll, and so forth.
In addition, once you calculate how many new customers you'll need to acquire in order to cover your marketing budget for the year, you'll have a specific goal for which to aim. Follow this formula to arrive at the correct number for your business:
annual marketing budget / (average sale x average number of transactions from one customer throughout the year x average customer lifetime value) = new customers needed per year
To demonstrate how this formula works in a real world scenario, imagine that your projected marketing budget for the year is $20,000. Your average sale is $10, and the average customer purchases from you 10 times a year for a total of 5 years. Thus, you would need to acquire 40 new customers to cover your marketing investment for a single year (20,000 / (10 x 10 x 5) = 40).
While results may not be immediately apparent, it is imperative that you view marketing spend as a mandatory cost, instead of an expense that can be reduced on a whim. In the final analysis, the health and growth of your business depend on effective marketing spend.
Developing a Marketing Budget that Works for Your Business
While it is helpful to know the average marketing spend for your industry, a company's marketing budget should never be developed based on what peers or competitors are doing. Instead, an effective budget will be tailored to your company's size, age, market share, business objectives, and growth.
At Zimmer Marketing, our experienced marketing experts can help you to craft a marketing budget that yields measurable and sustainable results. We won't throw prefabricated numbers at you; instead, we'll determine what your real needs are, and advise you accordingly. Contact us today to learn more.