A common question among business owners is how much should they be spending on marketing. The correct answer is…it depends. There are many factors that can be considered in establishing the right amount to spend on marketing and advertising. Here are a few items to consider:
Industry Norms – Most industries have a spending range that generally encompasses most of the companies in that industry. Understanding this range is an important first step. Previous experience, feedback from other firms in the industry or searches on the internet or trade publications is all good sources of this information.
According to a report in Ad Age, ad spending in the United States as a percent of GDP was 2.2%. That number is probably low for what most organizations spend as it is just advertising and marketing services (trade shows, research, consulting, design, production, staff, etc.) can often comprise 25-50% of the total spending.
Spending ratios are obviously influenced by the business model for the industry. High margin businesses like beverages and software can afford to spend a greater amount of their revenue on advertising than lower margin business like electronics or banking.
“Fixed” Program – Some business will find that their business requires a “minimum” level of marketing expenditures to be competitive. For example, if a business finds that they need to attend a certain number of industry trade shows or advertise regularly in certain publications, they will find that their budget is driven by a “fixed” set of expenditures which will set the budget.
Competitive Position – If Company “A” is in an industry in which the norm is 5%, consideration needs to be given to the size of the competitors the company is faced with. If the company does one million in revenue, fixing the budget at 5% would result in a $50,000 advertising budget. If all the companies in direct competition have five million in revenue and if they also spend 5%, they will have five times the budget as Company “A”. Some consideration should be given to increasing the spending percent, focusing the budget on a specific vertical customer segment and/or limiting the geographic reach of the marketing plan.
Growth Goals – A company that has aggressive goals for increasing revenues should consider how much marketing budget would be generated by the higher revenue goal. Establishing the marketing budget as a ratio of the revenue goal is another approach. Reducing marketing spending is likely to reduce the acquisition of new customers or even jeopardize the company’s current market share. Growing quickly also requires increased working capital for inventory, staffing and accounts receivable so the prospect of increasing marketing spending can often times be challenging for high growth companies. Companies that have plans to growth rapidly generally need to spend a higher percent of sales to achieve that goal.
Budgets in Recessions – Some companies find themselves losing customers and revenues during recessions. One natural tendency is to reduce marketing budgets to keep them “in line”. Does it seem logical that if business is down 10% that marketing budgets should also be reduced by 10%? What seems more logical is that if you reduce your budget by 10%, you should probably also reduce your revenue expectations by a like amount. Resist reducing budgets as it gives you less exposure to prospects in your pipeline. Focus instead on improving the media mix, the creative or relevancy of your message.
Marketing spending is often perplexing for business owners as the security of immediate results if often elusive. Prospects generally need to be exposed to a brand multiple times before they are likely to change providers or make a purchase. Nurturing tomorrow’s customers is a process that the savvy marketer has been investing in for months or years. Each business has a slightly different situation that needs to be considered in establishing a marketing budget. Reviewing the approaches discussed in this article is a good first step. Optimizing the marketing spending through benchmarking and tracking metrics specific to the company’s situation on an ongoing basis is a requirement for businesses to thrive and have above average results.