How much should you spend on marketing?

“What’s your marketing spend?” seems like a pretty straight forward question to ask in your first prospect meeting. However, getting an answer can often be hard work.

As a marketing agency that usually works with small and medium-sized businesses, we dance around the topic of marketing budgets a lot. Despite being critical to business success, 80 per cent of the company leaders I meet have not considered what their marketing budget should be. People like to hold the ‘money card’ close to their chest. Then we play budget bingo, coming up with figures and options until the head of marketing finally reveals their magic number. This process in itself costs time and money and often leads to frustrations for both sides with negotiations going on for weeks at a time.

So what’s the answer to this modern dilemma?

Firstly, it’s important to define what we mean by a marketing budget. It’s all the costs relating to a business’ marketing, advertising, public relations, promotions and anything else you might blanket under ‘marketing’ when it comes to day-to-day operations. For example, this may include Google advertising, social media, digital advertisingcollateral, events or search engine optimisation.

You should consider the cost of performing and managing the activity, operational costs, such as software subscriptions or web hosting, and the associated advertising spend. For example, you might consider that advertising with Google may cost $5000 a month, but you’ll need someone who knows what they’re doing to optimise the campaigns and track results. It’s also important to think in longer-terms, such as six or 12 months, so that you can allow for flex in your budget. There might be major seasonal campaigns or business development investments throughout the year (more on that below).

Chicken and egg marketing

When business owners consider how much to spend on marketing, they often get caught up in the chicken and egg cause and effect circle. “I need to grow my brand to make money, but I have no money to do that.” AKA, “I need to see sales before I invest more in marketing.” Sound familiar?

I call this chicken and egg marketing. However, to establish and grow a brand, it’s critical that your marketing budget is well funded. Anything worth building is almost always going to take more time and way more money than expected (if you’ve ever done a home renovation, you know that I mean). There’s nothing worse than spending every dollar you have to build something the wrong way only to have to start over again. We see this so often when it comes to special projects – DIY websites being the main offender (more on that below).

The five per cent rule for marketing spend

So what’s a realistic marketing spend? The best way to budget is to take a percentage of your company’s gross yearly revenue to reinvest into marketing. The U.S. Small Business Administration recommends that established businesses should be spending seven to eight per cent of its gross revenue for marketing and advertising if it’s doing less than $5 million a year in sales and its net profit margin is in the 10 to 12 per cent range.

If you’re a new business, that percentage is higher: you need to be investing around 12 to 20 per cent of your gross yearly revenue. This is because you’re competing with bigger, more established businesses with a larger digital presence and higher domain authority.

Other more conservative industry reports suggest that a general rule of thumb is that businesses will invest somewhere between five and 10 per cent of yearly gross revenue on marketing. So, if your small business is bringing in $800,000 of gross revenue per year with a net profit of more than 10 per cent, you can safely budget between $40,000 to $80,000 on day-to-day marketing. Of course, this depends on risk factors, rate of projected growth and level of competition, and it doesn’t include special projects.

Special marketing projects

If you indulge me for a minute while I refer back to my house renovation example, this is where you pull up the carpets only to reveal that your hardwood floors have rotted beneath you. That’s going to cost a lot more than you bargained for to secure your foundations. So, in the case of your business, you may need to spend additional funds on special operational projects where necessary – for example, a new website to improve conversion rates. Let me explain:

Example 1: 

Software company X – let’s call them Tuesday.com – has an underperforming website and is converting only one in every 10,000 visitors into a customer (a conversion rate of 1 per cent). Tuesday.com receives 3000 unique monthly visits, meaning that the company gains one new customer every three months.

If Tuesday.com was investing $1,000 a month in online advertising, their cost to acquire (CTA) each customer would be $3,000.

Example 2: 

Company Y – let’s call them Basana – is a competitor and is receiving similar conversions results on their website which is now five years old. The company’s marketing manager decides to invest an additional marketing/business development budget towards an updated website. The new website is optimised for better conversions, mobile-friendly, significantly faster and has been implemented with a SEO strategy. Its cost? $10,000.

Basana now has a website that converts two in every 10,000 visitors into a customer (a conversion rate of 2 per cent – double of what Tuesday.com is getting). And their monthly traffic increases from 3000 to 5000 meaning that they now convert one new customer every month.

If Basana was investing $1,000 a month in online advertising, their cost to acquire each customer would be $1,000.

Basana is spending 66 per cent less to acquire each new customer compared to Tuesday.com.

This example, while rudimentary, demonstrates why it’s almost always beneficial to exceed your five per cent marketing budget for operational investments such as websites, sales collateral and brand videos.

How to distribute your marketing spend

When we meet with new clients, part of our initial strategy sessions are all about defining measurable goals for the year. We work together to define at least three S.M.A.R.T. (specific, measurable, attainable, relevant and time-based) goals. This is where we make sure that your dollars are spent wisely and tied tightly to specific deliverables.

This may be to increase website traffic – measured by unique visitors per month, to increase searchability – measured by local SEO rankings and click-throughs, or to grow leads – measured by total leads gained through digital marketing tactics.

From there, we can start to assign budgets and develop a strategy.

However, before anything can roll out, we review a company’s digital presence and all marketing material. Going back to the Tuesday.com example above, if your website is underperforming, there are barriers to conversion, your brand is dated or inconsistent across channels, your social media is a ghost town or you’re nowhere to be seen in search results, we have some serious foundational work to carry out first.

We’ll also check that your company has the tracking tools in place to ensure that we can accurately measure the success of any campaign (going back to our S.M.A.R.T goals).

If you need to remedy any brand weaknesses, more often than not, it will need to be done with extra funding—marketing and/or business development funding—so you still have the full five  or 10 per cent of sales revenue to devote to day-to-day marketing activities.

Remember, both are necessary for growth; with no traffic, even the best website in the world is worth very little.

How do you budget for marketing? Leave us a comment below.

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