The Four Factors That Determine Your Marketing Budget
The Four Factors That Determine Your Marketing Budget
While US companies spend an average of 7-8% of annual revenue on marketing, individual company budgets range from 0.5% to more than 20%. To gauge how much your company should be allocating to marketing, use this four-factor formula.
In our experience, marketing and sales leadership never feels marketing budgets are big enough, while the rest of the C-suite almost always feels they're too big. One contributor to this conflict is a lack of ROI transparency: if CFOs and CEOs aren't sure what they're getting for their spend, anything spent is too much. The other contributor to the conflict is a lack of benchmarking tools, because the "right" amount to spend on marketing is unique to every company.
While there's no silver bullet for determining exactly how much to spend on marketing, the steps below can help you estimate an appropriate marketing budget for your business based on four factors identified in recent research* and our own experience in B2B marketing: your industry, the size of your company, your economic sector, and the business-specific dynamics impacting your company.
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Factor 1: Industry
Industry dynamics play a big role in companies' marketing budgets. Firms in industries with relatively high average profit margins are able to allocate more budget to marketing, while those in highly competitive industries are forced to do. Firms in mature industries tend to allocate less to marketing as growth slows, and the health of the overall economy impacts certain industries more than others, often constraining marketing investments.
The chart to the left shows average marketing budgets as a percent of revenue, and as you can see, budgets vary widely. In recent years, the education, communications/media, and consumer services industries' budgets were highest as a percent of revenue, while budgets for firms in the energy, mining/construction, and manufacturing industries were lowest.
Of course, your industry is only the first of four factors to use in estimating how much your company should spend on marketing. Use the average for your industry as a baseline and adjust based on the next two factors.
Factor 2: Company Size
The size of your company impacts how much you'll spend on marketing, but not necessarily in the way you might expect. According to the 2018 CMO Survey, the average marketing budget as a percent of revenue is higher in the lowest revenue range, but varies widely as revenue increases.
To make your industry's baseline percentage more accurate, use the chart to the right to locate your company's annual revenue range and adjust the baseline percentage as indicated.
Factor 3: Economic Sector
Marketing budgets are far higher at B2C than B2B companies, according to the report, but whether a company's primary focus is product or service also has an impact. While the average marketing budget for all firms is 7.3% of revenue, this ranges from 5.4% for B2B product firms up to 10.1% for B2C product firms. Budgets for service firms in the B2B and B2C sectors are more closely aligned, at 7.1% and 8.9%, respectively.
For estimation purposes, we suggest you multiply your % by a factor of .75 if you’re a primarily B2B services company and .5 if you're a primarily B2B product company.
Factor 4: Business-specific Dynamics
While many other factors impact marketing budgets besides industry, company size, and economic sector, most are too subtle to be relevant when trying to benchmark how much your firm should spend. However, a few dynamics specific to certain businesses have been found to have significant impact on spend, and your estimate should be adjusted accordingly if the following are true for your company:
- In an industry experiencing low single-digit growth, cut your % in half
- If more than 10% of your sales are via the internet, double your %
The most important factor: your objectives!
Regardless of its size, any marketing budget that's not fully aligned with your marketing strategy and objectives will be wasted. If your team is unclear exactly what they're trying to achieve and how results will be measured, start there first before worrying about how much money you'll need.
While the formula above will help determine what other companies like yours are spending, pegging your budget to that estimate won't be effective if your goals are significantly different. Ideally, your marketing budget should be built by working backwards from your marketing objectives, with every dollar assigned to a specific goal. Just picking a percentage without focusing on what you're trying to achieve can leave you under- (or over-) funded, so start with the end in mind when building your budget.