Determining Your Marketing Budget Sweet Spot for The New Fiscal Year

In the world of high technology, you’ll sometimes hear about a line being drawn between those who make and those who sell.

The implication, of course, is that those who make require more talent than those who sell. Upon even the swiftest examination, however, that argument falls to pieces. After all, Steve Jobs wasn’t a coder. He didn’t build things.

But, he had a genius for defining what people wanted — usually before they were even aware that they harbored such desires. He knew what resonated; what made an audience see a product and feel “that’s me — I’m the kind of person who owns this.”

In other words, he knew marketing.

Marketing and advertising spend: By the numbers

It hasn’t always been easy to quantify the effect of a marketing or ad campaign. With today’s advanced analytics and metrics, however, that task has grown much easier.

Determining the right percentage to budget toward marketing and advertising is another question that many small to mid-sized firms wrestle with. For the most prominent enterprises, the numbers are impressive: The top 200 largest spenders were responsible for $155 billion in ad and marketing expenditures in 2017. Amazon alone spent $3.4 billion in 2017 on ads and marketing promotions. 

According to research from Deloitte and the Wall Street Journal, marketing budgets comprise about 11% of the total company budget for the average firm, though the level of spending varies by industry. This means that for smaller companies, the process of determining a marketing budget figure should also be influenced by the sector in which a business operates. The disparities between industries can be fairly stark.

Consider the following industry averages for marketing as a percentage of the total budget:

  • Consumer packaged goods: 24%
  • Technology: 15%
  • Communications/Media: 13%
  • Retail: 10%
  • Banking: 8%
  • Manufacturing: 8%
  • Energy: 4%

So, what’s driving these budgetary decisions? According to the research, nearly 40% of companies identify marketing as the leading revenue growth driver. Companies that report marketing as being primarily responsible for revenue growth dedicate 14.5% of their total budget to marketing. Firms that do not identify marketing as the leading growth driver average around 10%.

Interestingly enough, companies that integrate marketing analytics into their decision-making have marketing budgets that are 70% higher than those of companies that do not — perhaps an indication that analytics are helping companies get a better grasp on marketing campaign ROI.

Finding the budgetary sweet spot

If you have a small to mid-sized firm, you’ve probably heard that 10% of revenue is a common yardstick for marketing spending. Larger firms spend a bit more, smaller firms a bit less. There are also other models you can use to arrive at a figure.

As the data shows, however, it’s critically important to consider the industry in which you’re operating. Spending varies widely among industries, and the more “consumer-facing” a sector is, the greater the need for marketing and advertising.

Product or service type also plays a role. Companies with a strongly differentiated (or patented) product or service and a deep competitive moat may not need to rely on marketing and advertising to the same degree.

The size of the business — and the growth stage — also need to be considered. The Small Business Administration suggests that firms with under $5 million in revenue should allocate around 7 to 8% of these revenues to marketing. If you’re a retail business in the early brand-building stage, however, spending 20% of sales on marketing is typical.

All of these figures should be taken simply as a rough estimate, as there is no universal method for building a company. Many of today’s fastest-growing technology firms, for example, devote 30 or even 40% of their revenue into marketing.

The takeaway

With the beginning of a new fiscal year, now is the ideal time for businesses to examine their marketing spend. Given broader industry trends, improved data analytics and the link we’ve seen between higher marketing spending and growth, it might be the perfect time to experiment with a more substantial marketing budget.

Contact our team today to make sure you are spending your marketing and advertising budget properly.

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