How much should you spend on marketing?

Renner Kevin MSC column

The marketing services firm Marketo recently published research of 300 B2B firms – software, business services, Internet, manufacturing, hardware and the like. The companies ranged in size from fewer than 10 employees to
more than 1,000.

Marketo found that business services firms spent substantially more on marketing (13 percent of revenue) than manufacturing companies (8 percent). Meanwhile, software and Internet companies spent 10 percent.

Another research project published in 2011 by the group Marketing Sherpa, showed a similar pattern for spending. While overall spending levels were lower in 2010 (no doubt due to weak economic conditions), business service firms spent more than twice as much as industrial and manufacturing companies, and much more than business technology companies.

Other factors should shape how much you spend on marketing; both surveys found that bigger companies (number of employees) spent a smaller percentage of revenue on marketing.

So what’s behind the falling ratio as companies grow? From our viewpoint, it’s that marketing scales well. That is, bigger companies run bigger marketing campaigns and programs. A marketing manager who controls $50,000 in spending at a small company isn’t as highly leveraged as a counterpart who has a $300,000 budget at a larger company. I met a marketing executive at Intel once who told me he had a $200 million budget to launch one new microprocessor. That was the size of my entire company at the time.

Your business model will also dictate how much you spend on marketing. If you’re in a low-margin business (e.g. computer displays with 10 percent gross margins), you have a lot less money to put into marketing and selling than a software company generating 80 percent gross margins.

Your expected growth rate will determine your marketing spend ratio as well. Let’s say you’re aggressively pursuing share in a rapidly expanding market, and want growth of 50 percent a year. Basing your marketing investment on this year’s revenue, instead of on next year’s target, could well leave you vulnerable to hungrier competitors.

In addition, your competitive strategy, the strength of your balance sheet and the mix of “marketing to selling” activity needed in your category will all shape what you spend on marketing.

There’s no substitute for strong business judgment when laying out investment plans for marketing or any other area of your business. But the numbers above, and these guidelines, can help if you’re struggling for some context on what’s right for your business.

 

Kevin Renner is president of BrandNew, a Portland-based strategic growth advisory firm and business accelerator. To contact him, visit www.BrandNew.us.com.

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