Now, this is a subject very close to my heart and can be a little controversial considering I’m a marketer.. selling marketing services. I know you may think that we as a company or as marketers will just take all the money you’re willing to throw at us. I won’t lie, the great things you can do and the ROI (Return On Investments) you see with a decent marketing budget is rather impressive. On the other hand, trying to show positive results and get the value our clients want with a ridiculously low budget and still being held accountable for results is extremely frustrating for all sides. So I can see why you would think our perspective on this matter may be skewed.
But on the other hand I’m a business owner, and not just for a marketing agency. I have been part owner in a service based business that requires a great deal of marketing to keep new customers and existing ones coming through the door. I know what it means to juggle all the complexities of large overhead, low sales and finding a way to grow a business. Budgets are tricky, especially when you are a smaller business where you directly feel the impact of every dollar earned and every dollar spent. So I get it. It can be a hard pill to swallow dishing out money to something you hope will work.
The other argument you need to consider is it’s bad business if we are taking our customer’s money and not able to show that value and results they expect or hope to achieve. We have a whole service offering based on customer retention. Thus, we can’t exactly retain OUR customers if we’re just taking their huge budgets and running with it without showing results. By keeping you happy we stay in business.
But your marketing budget should be an investment, not just an expense. If it’s not generating more sales for you, it’s not working. Now that doesn’t mean you stop spending it, it means you need to reassess how much you are spending.. asking yourself is it enough to feel the benefits? Where you are spending it and if those areas are in fact having a positive impact?
So to answer the first question, are you spending enough? A lot of people I talk to say..”let’s just put a little here and see what happens”. That isn’t a bad idea in theory, but whether you will get an accurate picture of results is determined by if you are in fact spending enough in that area to reach enough people to feed the sales funnel. You see, the people you reach drills down to the next level of people you catch their attention even briefly, to those that are actually looking for a service or offering like yours, then down to those that you have intrigued enough to take the time to contact you.. and down further to those you can engage enough to have a discussion or even quote/estimate/ or walk into your retail space. Finally this leads to those that say “YES” and actually buy your product or service. This, of course, is a dumbed down version of a sales funnel but really if you think that there is at least these steps to closing a sale, you need to be reaching enough people that you can see some kind of result. Which is why if you’re going to test a marketing practice or strategy… you need to give it a fair enough budget that you actually will get an accurate picture of what it will do for you. You can’t expect to spend pennies and have a huge ripple effect. Yes of course, the right message, the most clever creative can turn the results to your favor, but you shouldn’t hope for that lottery winning creative director to change the odds. There is a formula that should work regardless. Great creative and messaging will take the results from being average to amazing.
As I mentioned, trying to generate good positive results with little to no marketing budget is truly an impossible task. So what should you be spending on your marketing? How much of your revenue should go back into your marketing and sales budget? I wish there was a formula for every business. But there are so many factors to consider that unless we sit down and analyze your market, your location, who your target audience is, the demand of what you are offering and the competition that stands in your way – I can’t give you that magic number. But what I can give you is an idea of what most companies spend or rather invest to get results that propel positive growth enough that they are willing to increase their marketing budgets for the next year.
According to the 2014 CMO survey published by the American Marketing Association and the Duke University, companies spent between 9%-11% of their revenue on marketing. Now we are not talking profit.. we are talking total revenue. It’s a very different number and for smaller business can seem pretty scary.
- Companies with less than $25 million in revenue spent an average of 11% on their marketing.
- Companies with $25-$99 million in revenue spent an average of 9% on their marketing.
I bet you’re thinking.. my business isn’t anywhere near these numbers when it comes to revenue. But what you need to remember is companies that are generating this much in sales are still allocating a huge amount of money into their marketing. Now, these companies are also established but yet have large targets for growth. Companies like Microsoft, Cisco, Intel, Salesforce, Constant Contact, LinkedIn, Marketo, IDEXX Laboratories all spent over 14% of their revenue on marketing and sales and some even as much as 50%!!! That may seem to be insane numbers, but marketing does matter so if you are not willing to invest in it, you will not get any ROI. This is also not a lottery where if you don’t play you will have no chance to win. But if you don’t invest in marketing, you might as well close your doors and save your start up costs… or what ever you plan to spend on R&D, service, new products all of it.
Henry Ford said,” A man who stops advertising to save money is like a man who stops the clock to save time”.
It’s also crucial for companies to know when they should ramp up their marketing and when they can scale back. I, of course, would love to say… NEVER scale back. But let’s be realistic here, you don’t want to grow faster then you can effectively service. But also know, if you are at the point where you are desperate to get new customers and you’re not sure if you’re going to be able to keep the doors open, I’m afraid you have waited too long. Ramping up your marketing now will help of course, but at that point, you don’t have the money to ramp it up.
The time to increase your budgets are at the beginning of your business – ya no brainier I know – and do a large push or budget boost when things are going well but your sales are starting to plateau. I say PLATEAU not drop. You have to think of it as a curve, you need to increase your marketing spend when you still have sales coming in and a budget to work with. If you don’t ramp up what you are doing then, that plateau will most likely start turning into a down turn which is when most companies don’t have the money to increase their budgets. Catch the curve before it goes down. That is how you stimulate the next growth curve and increase your sales. If you wait too long or think things are going well enough, it’s only a matter of time before that down curve begins. The sad part is it often happens quicker than you expect. And the curve is often steeper than expected as well… putting you in a position where you are facing some very hard decisions and even bankruptcy.
So if I was to try and generalize everything and give you a magic number to start with, experience, as well as all the research out there, will tell you the 10% of your revenue is a good number to start with for existing businesses. It’s scary for small businesses to think they need to invest this much, especially when 10% may often mean the owners themselves are taking a pay cut just to make that investment. For new businesses, you need to expect to spend a lot more to get the ball rolling. But again, it needs to be looked at as an investment and if the right approach is being taken, you are pretty much guaranteed to see a positive impact and definitely get that money back.
That’s why you need help and work with people that know, who you are comfortable with and are willing to test the market out while always adjusting along the way. Remember, this is also an investment over time, so you need to give it the proper amount of time. But the right agency will work with you and will constantly be analyzing and adjusting what is being done till you are seeing incredible results. If they aren’t, fire them and come talk to us. 😉