One of the first questions many clients ask is how much to appropriate for a marketing budget. The quick answer for marketing budget allocation is a target of between 3 -8% of a company’s overall sales – with 5% often cited as the norm based upon a review of a range of benchmarking and peer group studies.
The following factors can influence the size of the marketing budget:
Compared to other functional budgets, the marketing budget is unique in that it must allocate to both strategic, longer term, and tactical, nearer term elements.
For example, a balanced budget will include both investments in VOC (voice of the customer) and other innovation-focused activities that have a longer term payoff, and more immediate, demand-generating activities like SEO, trade shows, and sales collateral.
One of the most significant changes impacting marketing effectiveness over the past decade has been the advent of tools that allow us to more accurately measure the ROI of marketing spending, particularly in the areas of digital, search engine marketing and pay-per click advertising. According to eMarketer, companies will spend upward of $50 billion on digital marketing in 2014 – continuing a five-year trend of explosive growth in the segment.
There are three areas that comprise the mix of marketing spend: product marketing, marketing communications (sometimes known as marcom), brand building or advertising, and channel marketing (sometimes called sales support). Within each of these groups, what is, and isn’t included, can be debated.
Some questions include:
Some would even argue that the cost of the sales force is a subset of the marketing budget, as we could eliminate the sales team and shift to all online demand generation or buy a Super Bowl ad! I will leave that debate for another day.
1. Does the firm have significant growth opportunities? (I believe most firms do, even in mature industries). If so, investing in product development, customer intimacy or demand generation at a level beyond my industries average can help accelerate growth.
2. Do the investments competitors are making fall under the three identified areas of marketing: product marketing, marketing communications, and demand generation?Above or below our spend? At a minimum, understanding how businesses in your industry allocate marketing budgets can be insightful. (Seet the Marketing Sherpa chart at the end of this article.)
3. Where are our products in the product life cycle? Smaller companies who are still on the growth curve of their life cycle typically bump their marketing spend by 50 percent or more (as a percentage of revenue), according to studies by Marketing Sherpa, Forrester and eConsultancy.
4. What is the price elasticity and pricing leverage in the market? Do we understand the dynamics of pricing, and are we optimizing price on each deal? Would there be a payoff if we had a greater focus on pricing, both strategically and tactically?
5. What ROI have we seen on pay-per-click (PPC) and other digital lead generation activities? A good CRM system, such as SalesForce.com or HubSpot, allows you to calculate the value of leads in terms of sales and margin, and the effective cost per lead based on lead yield.
6. Who is truly generating demand and preference for your products? If you are a challenger brand looking to overtake your competition, or simply struggling to gain your own unique share of voice, you’ll need to consider a greater investment than merely placing a product with distributors.
7. Do we do marketing in-house or outsource to specialists? Would your company be better having one generalist in-house or outsourcing to several agencies that are specialists and can provide expert advice in each area?
Having applied the above analysis to our business at Chief Outsiders, we have set our total marketing spend at a level above 10 percent. For us, the key criteria that led us to that decision include:
At Chief Outsiders, we are constantly measuring the effectiveness of our investments in both online organic and paid ads and more traditional networking and sponsorships. In today’s environment, dynamically allocating spend based on results and costs ensures us the best yield on our investment.
It’s important to make sure your budget is keeping pace with what the competitive landscape is demanding. In a recent CMO Survey conducted by the Fuqua School of Business at Duke University and the American Marketing Association, more than half of all businesses surveyed indicated their marketing spend will increase during the next 12 months. A study by Forrester Research pinpointed the increase in marketing budgets at 6 percent for 2014.
When benchmarking your sales and marketing budget, ensure you are being ruthlessly effective. According to Digital Sherpa, improving the impact of your marketing communications, both in your approach and execution, can “significantly impact marketing effectiveness without a big increase in resources.”
What has been your experience with setting your marketing budget and marketing spend mix?