Marketing budgets make CEOs and CFOs uncomfortable. They often are large, have lots of complicated moving parts, and their impact can be hard to measure and attribute to marketing. Marketing budgets commonly range from low single digits to 15% of revenue (and even higher for companies undergoing rapid growth). And by the way, there is no one “right” benchmark for marketing budgets. In this two-part series, marketing strategy and budget expert Peter Mahoney and CMO Jeff Loeb will pull from their experience and share tips on right-sizing marketing budgets and preparing for challenges you may encounter.
The right marketing budget for an organization depends on many factors including growth rates, business strategy, go-to-market model, company profitability, industry category and maturity, and more. No wonder the annual planning process can get a little heated when setting marketing budgets. But without marketing, sales can sputter as it runs uphill, into the wind, carrying a 100-pound backpack. Marketing plays a critical role in creating awareness, generating leads, and moving prospects along the buyer’s journey. So how can companies right-size their marketing budget? And how can CMOs and marketing teams get alignment around spending priorities?
To answer these questions, I’ve turned to marketing strategy and budget expert Peter Mahoney, CEO of Plannuh, Inc. Peter has decades of experience managing marketing teams, strategy and budgets, including managing a $150M annual budget at Nuance. Peter started Plannuh in 2017 to address the pain and suffering companies experience managing marketing budgets and plans with disconnected tools.
Part 1 of this series has 2 sections:
Jeff Loeb: Since marketing is often the largest discretionary expense, how do organizations right-size their marketing budgets? How do you figure out the optimal marketing expenditure?
Peter Mahoney: Establishing the right number involves a lot of considerations, and a good place to start is with some basic benchmarks. Sirius Decisions has good benchmark data as does the CMO survey from Duke University which is publicly available. As a starting point, here’s marketing spend as a percentage of revenue from the CMO Survey, cut by sector:
Sirius Decisions cuts benchmark data across 6 revenue bands which provides more budget granularity based on the size of company. Basically, smaller companies spend a higher percentage of revenue on marketing than larger businesses.
But realize that benchmarks should be thought of as guardrails, and not specific guidance for your business. The reality is you need to look at a bunch of different factors when you're determining your budget. You need to look at things like your growth rate. If you're growing fast and you're trying to lean into your growth, then your budget should be higher than average. If you're shrinking, obviously the opposite is true. It also depends on your strategy. For instance, if you are more of a brand marketer versus a digital direct conversion marketer versus a content marketer, you might have a different mix and tolerance for what you should spend. You also need to consider your company's P&L. What is the overall profitability of your business? What can you afford to spend on marketing? What are the thresholds of that profitability? It's impossible to say there's an exact percent because within every industry, there's a very broad distribution based on company characteristics such as profitability, strategy, and growth rate. All of these things need to be factored in and you need to make a smart business decision accordingly. While benchmarks are a useful starting point, all these other elements have to be applied to understand exactly what you should spend. That is why I believe more and more CMOs need to think like general managers because they need to analyze the overall profitability of their business.
Jeff Loeb: What are the biggest challenges marketing teams face related to optimizing marketing spend and managing budgets?
Peter Mahoney: It really comes down to a few key problems that people have. And they range from tactical to strategic. So tactically, there's a lack of visibility that people have into their budgets. This is especially true as you get beyond a couple of people with their hands in the budget. It's really difficult to manage where things are at any given time, and that comes from the fact that by definition, marketers are planning things far off into the future. And you often don't know for 30/60/90 days what the real impact of the budget was and how much money was actually spent, especially in distributed organizations. So just lack of visibility makes it very difficult for people to forecast. And as a result, they tend to not be very good at spending on target. So that often leads to underspending, which is strangely rewarded, because your job as a marketer is to actually deploy resources, both human and financial to achieve your objectives. And if you're not deploying enough resources at the right things, you're not getting the results that you should be getting. So it's actually a pretty significant problem. Without good visibility you can't be agile, which means you can't change things and adjust quickly to market dynamics. And of course, right now in the COVID-19 era, we're dealing in a moment where the ability to change is pretty important. So budgets tend to be brittle and it's very challenging to figure out how to reflow or make a change in your plan.
Strategically, that’s a huge problem. That was the thing that kept me up at night all the time when I was at Nuance. Without a good systematic approach to budget management you have no idea where the money is going. And a big part of the CMO’s job is deploying capital and resources to achieve your objectives. But if you don't know how it's being spent, and where it's being spent, and to what end, then that that can be a terrifying thing. So I would often go to my individual marketing managers and ask “what are you working on?” and they would show me this list of stuff. And it was literally disconnected. It's what we'd call random acts of marketing. So not really thoughtfully spent. The reality is that it is very difficult to keep track of your budget versus how much is committed versus your actuals at any given point in time. This is the main reason I started Plannuh, an AI-driven marketing budget and planning software for optimizing the performance of your spend and strategy.
In the next blog, we'll discuss aligning priorities and spending with the CEO and CFO.