One of the most common questions growth-minded entrepreneurs ask us is how much they should spend on their marketing budget. Unfortunately, the simple answer to this question is neither simple, nor informative, as the conditions that inform marketing spending vary considerably from industry to industry. Your competition, R&D costs, and type of product or service all combine to inform the final budget.
That said, below are a few of the guidelines we recommend.
Spend a Fixed Percentage on Marketing, or The (too) Simple Answer
How much is a single new customer worth to you in net profit over a lifetime? It’s not an easy number to determine, but once you know this, you have the basic information necessary to ask the most important question in determining your marketing budget:
How much are you willing to spend on acquiring that new customer?
Say, for the sake of example, that a customer is worth $2,400 in profit over a lifetime. Would you spend $100 to acquire them? What about $240? What about $480?
Some recommend spending 20% on new customer acquisition, some say 10%. There is no magic bullet we can offer. Because we work primarily with small to medium businesses, we often suggest a number in the area of 3-4% of total revenues. This includes the costs of all advertising and marketing activities, from Google AdWords to Direct Mail campaigns (if applicable).
The thing is, this too simple formula can often backfire. We recommend 3-4% in total allocation of resources when you’re just looking to maintain your current marketing initiatives. It’s a rough baseline, not a panacea.
Think About Your Objectives and Spend Accordingly, or The Complex Answer
If you’re simply looking to maintain your current levels of growth, then 3-4% may in fact suit you just fine. This means that while you may reallocate marketing resources, you’re still operating within the same parameters. Shifting resources from AdWords to Direct Mail may be more efficient, but it probably won’t generate earth-shattering results.
What you are not doing with 3-4% is:
- Redesigning your website;
- Expanding your marketing department;
- Attending more events;
- Launching a special campaign or promotion;
A Reminder: Marketing is Not Just Advertising
“Marketing is about spreading ideas, and spreading ideas is the single most important output of our civilization.”
- Internal communications, newsletters and memos;
- Events, both internal and external;
- Public relations, press releases, news conferences;
- Writing and promoting recruitment efforts;
- Market research, R&D;
- And any other activity that requires putting a piece of information in front of someone else.