Clients and prospective clients often ask what the appropriate amount is
for their company to spend on marketing and advertising.
Typical questions include:
- What amount makes sense for my size business?
- What is the average amount my competitors are spending?
- Or, How much do I have to spend in order to see a ROI?
Unfortunately, there isn’t an absolute or universal answer. When it comes to marketing and advertising, there’s a wide array of strategies, tools and tactics to consider and implement. And while Statista predicted that the United States alone would spend $183 billion on advertising efforts this year, it is still unclear how much your unique company should earmark.
At THIEL, an approach that has worked well is to first consider the average lifetime net profit value of a customer, in order to understand how much to invest acquiring and retaining customers, to maximize return on investment (ROI).
As a B2B branding and marketing agency, we help our clients acquire and retain profitable customers. To facilitate that, our clients must maintain a database of meaningful, actionable customer profile information that provides them the opportunity to identify customers’ lifetime value, grade customers based on their potential profitability, and use the profiles of best customers to guide efforts in marketing to similar prospects, and to retain and cross-sell to the customers they already have.
In that manner, customer lifetime value can serve as a crucial guide for deciding how much to spend on marketing. One rule of thumb is to spend 1/3 of the customer lifetime value to acquire a new customer. And remember, it typically costs 5 times more to acquire a new customer than it does to retain, upsell or cross-sell to an existing one.
Recent suggestions published by the U.S. Small Business Administration identify a few other ways of setting marketing budgets. They are:
- Marketing by Percentages
- Profit Margins
When it comes to marketing by percentages, the Administration recommends spending 7 to 8 percent of gross revenue for marketing and advertising if you’re doing less than $5 million a year in sales and your net profit margin — after all expenses — is in the 10 percent to 12 percent range. Start-up and small businesses though, are advised by some marketing experts to allocate between 2 and 3 percent of revenue or up to 20 percent in a competitive industry. Yet, A recent survey of 168 Chief Marketing Officers revealed that marketing budgets account for as much as 40 percent of a firm’s budget, with a median of 10 percent of the overall budget and a mean average of 12 percent. Competitive activity and how long you’ve been in business should also be taken into account when considering the percentage to allocate towards marketing and advertising spending.
The Administration also recommends letting affordability guide your spending. Internal or external factors may cause your spending to fluctuate, and events such as introducing a new product will require more spending. When considering how much of your budget to allocate to marketing and ad resources, take a look at your calendar and try planning ahead for fluctuating costs.
Lastly, many businesses’ marketing and advertising spending is task- or project-oriented. Task-oriented marketing requires a marketing plan, which can be gauged by the percentage-of-gross-revenue calculation for spending parameters. Along with anticipating spending costs to fluctuate, they recommend being flexible depending on the requirements of your marketing plan. Your industry trade association may be able to obtain specific marketing as a percentage-of-gross-revenue figures for your industry.
In the final analysis, your marketing and advertising budget should be determined based on the unique attributes of your company and what will yield a worthwhile ROI. Then, how you spend your budget is the next critical decision.
Principal and Brand Strategist
U.S. Small Business Administration