It’s a question you ask yourself when you run a business or first take over a marketing team – how much should we spend on marketing?  There are a few ways you can get to the right answer.

First, though, it’s good to decide what the purpose of marketing is in your business.  I think the primary purpose of marketing is to help you acquire customers.  In B2C, marketing helps you do that directly; in B2B, marketing helps you acquire contacts that you subsequently convert to leads which your sales team then converts to customers.  So, if you want to acquire more customers and grow your business in either B2B or B2C you’re going to have to increase your marketing efforts.  Companies that don’t spend on marketing don’t grow.

But back to that first question – how much should you spend?  You can develop an answer using a mixture of a ‘top-down’ and ‘bottom-up’ approach.

“Top down” – using industry benchmarks for marketing spend

Using this approach, you look at benchmark figures for your industry as a guide.  For example, MarketingSherpa produce an annual Technology Marketing Benchmark Survey for B2B marketers.  In the 2008 survey, the average share of revenue spent on marketing by technology organisations of between 100 and 1000 employees was 7.9%.  IDC also produce an annual Marketing Investment Planner and in 2007 reported the average share of revenue spent on marketing by 95 large technology firms was 3%, with software vendors spending 5.5%.  There’s a good white paper on some other benchmarks published by Marketo http://www.marketo.com/library/selling-marketing-budgets-to-cfo.pdf.  They mention a 2006 report by Blackfriars that found B2B companies planned to spend 4.3% of revenue on marketing compared to 6.8% for B2C firms.  There’s also a good post at http://www.imageworksstudio.com/client-lounge/articles-tips/setting-a-marketing-advertising-budget.html which quotes the US Small Business Administration as defining the correct percentage to be between 2% and 10% of sales, noting that for B2C, retail and pharmaceuticals the spend can exceed 20% during peak brand-building years.

So with a little bit of homework you should find a benchmark for your particular industry sector that gives you a ballpark indication of what your peers are spending. 

But of course just because most of your peers spend, say, 5% of revenue on marketing, that doesn’t mean you should simply aim to spend the same percentage in your business without some further justification.  Spending 5% of revenue on golf umbrellas and t-shirts won’t necessarily deliver you an increase in customers.

“Bottom up” – using your understanding of your business and current capacity

Most of us are not starting from a blank sheet when planning our marketing spend – there has usually been some level of marketing going on in the past that we can use as base for future planning.  The tricky bit is to connect your past marketing spend to the number of new customers you’ve acquired in previous years.  Can you analyse previous spend to get an idea of which expenditure produced new sales and new customers? For example in a B2B company, can you do a rough calculation such as “last year we spent X thousand dollars to produce Y leads which in turn produced Z customers”?  Do you have any data that indicates which marketing activities do or do not contribute to sales outcomes?    Ideally, you would like to understand your “cost of customer acquisition” – how much you have to spend to acquire each customer – and the “customer lifetime value” – how much each customer is worth to you on average.

Using a bottom-up approach you try to project future spend based on current results produced with the existing budget. 

Some additional factors to consider

So you can use a bottom approach to calculate the kind of budget you think is required to hit your customer acquisition targets this year; then you can cross-check this figure with the top-down industry benchmark figures. 

However, there are some other factors to consider before setting a budget, including:

• Life-stage of your company – if you are an early stage company trying to grow aggressively then you need to be prepared to spend disproportionately on marketing.  The Marketo paper gives the extreme example of Salesforce, which in their first year of revenue-generating operations spent $25.4m on sales and marketing with revenues of $5.4m.
• Profit margins – if company A has $100m in revenue and a 20% margin and company B has $100m in revenue but 2% margin, it makes sense that they may not both spend the same percentage of revenue on marketing.  Try to compare your company to peers who have both equivalent revenues and equivalent margins. 
• B2B versus B2C – spending in B2C marketing is different than in B2B. For example, consumer branding campaigns are potentially a big budget item in B2C but should not generally be a big element in a B2B marketing unit.
• Available market – are you selling into a new market with lots of customers to acquire, or is it a mature market that is dominated by large incumbents?  If it’s a mature market, increased marketing spend won’t automatically lead to new customer acquisition.

So now you have a number, what next?

So now you’ve developed a ballpark figure, say 5% of revenue, what should you spend it on? Yes, I know, holding a massive party is the obvious answer but may not be the correct one.  Your choice of what you spend money on should be refined quarter by quarter.  If you find that $10,000 spent on online ads produces $100,000 worth of new business, then double that spend.  If you find that $10,000 spent on attending tradeshows produces no new business, then cut down on your tradeshow attendance.  I’ll come back to marketing budget allocation at some point in the future because it touches on a lot of areas, including marketing processes, conversion rates, analytics, marketing attribution and much more.