3 Tips for More Effectively Setting Marketing Budgets
One of my favorite quotes comes from Peter Drucker. Considered the father of business consulting, he made an insightful observation:
"Because the purpose of business is to create a customer, the business enterprise has two--and only two--basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business."
For many CEOs though, marketing somehow seems like a cost, rather than an investment. They come to me seeking benchmarks and comparisons with competitors to know how much they have to spend. What no one wants to hear is the real answer to the question of how much should be spent in marketing, which is “it depends.” Since we are in budgeting and planning season right now, I thought I would give you some practical advice and guidelines to consider.
First, consider the type of business you are in, your target market and how you sell. The size of a marketing budget can vary based on a company’s industry, position in the industry, whether it is selling products, services or both, size, stage of development, the target market, etc. (In general, B2B marketing spend is less than that for a B2C focused company.) Most companies allocate between 5 and 12% of revenue for marketing, but it can vary widely depending on a company’s business and marketing objectives. Having said that, if you need a ballpark, start with 8% and adjust from there.
Second, make sure your marketing strategy and budget support a clear, focused business strategy (grow market share, expand into new markets, launch new revenue-producing products/services, increase customer retention, etc.). To grow market share you may need to spend more. If you go into new markets, you’ll need to spend more or decrease spending on other initiatives or in other markets. Also, add a budget amount for “unexpected opportunities” which you won’t want to pass up when the time comes – even if you don’t know what it will be!
Finally, consistently and accurately track the impact of marketing activities to determine what drives revenue (short & long term), customer retention and other metrics. Rank the marketing activities based on expected “bang for the buck” payback. Now build a marketing budget from the ground up. Those activities with the biggest payback go into the budget. Then execute, measure, adjust and repeat!
As the CEO, the questions you should ask about your marketing budget are:
Is our business strategy aligned across the company so initiatives in each department, especially in marketing, support the company’s goals? How does our marketing budget support those goals and the way we sell?
If we spent more could we significantly increase our market awareness or grow our customer base and market share? Can we afford or are we willing to make that investment now, and what are the implications or trade offs?
Do we have reliable (and consistently used) tracking systems in place to know whether we are spending our limited marketing dollars on the right things? How do we know our marketing dollars are being invested in the most productive way?
Additional Resources
While general guidelines can provide a range for what marketing spend should be relative to total revenue, aligning your company’s marketing initiatives with its business strategy and goals will help determine the optimal marketing budget for your company. One free resource about marketing budgets is an annual report summarizing an August survey of CMOs available at www.cmosurvey.org/results/. (The survey results are broken out based on industry and company size.)