So, do you want to grow your customer base, strengthen your brand, increase your market share, increase enrollment in a profitable program, or promote a lucrative product? These goals don’t necessarily require spending tons of money. However, if the goal is to build a strong brand and achieve year-on-year growth, one thing is clear: an annual marketing plan with strategies and tactics is needed to move the goals towards reality. This approach provides a framework within which to plan annual marketing efforts and implement them throughout the year. The key is to commit a percentage of annual gross revenue to the marketing budget.
Many companies prefer to use a percentage of gross revenue as a method of determining a marketing budget because it allows expenses to fluctuate as revenue does. The percentage of revenue a company should allocate to its overall marketing budget is not a single number, but depends on several factors. Every business environment and goals are unique, and determining the ideal amount to allocate to a marketing budget will vary. Factors can include business environment competition, profit margins, business lifecycle, specific growth goals, and a host of other considerations.
The U.S. Small Business Administration recommends spending 7-8% of gross revenue on marketing and advertising when sales are less than $5 million per year and the net profit margin, after all expenses, is between 10 and 12%. Marketing experts generally advise investing 2% to 10% of revenue in marketing, and some suggest as much as 20% if competition is high.
For example, a 2014 survey of chief marketing officers (CMOs) published by the American Marketing Association and Duke University (www.cmosurvey.org), reported averages of marketing investment as a percentage of revenue by type of company :
• B2B product companies: 10.6%
• B2B service companies: 10.1%
• B2C product companies: 16.3%
• B2C service companies: 10.9%
The survey found that companies with revenues under $25 million spent 11% on marketing, and companies with revenues between $25 million and $99 million spent 9% on marketing.
Marketing is important to the bottom line. Without it, a business will see little to no promotion or visibility, resulting in little or no growth. Looking at a range of medium and large sized businesses, the percentages of revenue invested in marketing and what is earned in return, the results are impressive.
An illustration is from email marketing company Constant Contact. In 2014, the company invested 38% of its $331 million revenue in sales and marketing. The resulting return on investment (ROI) was 16% growth over the previous year.
Twitter and LinkedIn, hugely successful social media companies, provide phenomenal examples of growth through heavy marketing investments. In 2014, Twitter invested 44% of its revenue in marketing, resulting in 111% growth, while LinkedIn invested slightly less, 35% of its revenue in sales and marketing, which 45% growth.
Well-established businesses may not need to invest such a high percentage of their revenue for high exposure that a small business may need. But to retain their market share, they must continue to invest in marketing efforts.
As the well-known brands below illustrate, their percentages of revenue invested in marketing and advertising in 2014 are as varied as the companies that established them.
• Apple: 7%
• Google: 12%
• Microsoft: 18%
• Oracle: 20%
• Sales force: 53%
A 2014 Gartner study found that companies spent an average of 10.2% of their 2014 annual revenue on marketing. In 2010, the Chief Marketing Officers Council surveyed 6,000 CMO members to gain insight into marketing and advertising spend across a wide range of companies. Survey results revealed that 58% of CMOs spent less than 4% of their gross revenue on marketing, 16% spent between 5% and 6%, 23% spent more than 6%, and 2% spent more than 20% . The survey found that 75% of CMO Council members spend an average of zero to 6% of their gross revenue on marketing.
A solid branding and marketing strategy is a powerful asset. Calculating the percentage of gross revenue provides a useful framework for determining a marketing budget. This approach also helps ensure that you’re not overspending on marketing or wasting money on haphazard spending throughout the year. Prioritize your goals and organize your marketing activities accordingly by month.
Regardless of the size of your business, the key is to have a marketing plan, work the plan, and see the plan work for you. —Andrea Young
