According to Gartner, the world’s leading research and advisory company, the average marketing budget has risen to an all-time high of 12% of company revenue*
I think that’s too high, and that it’s symptomatic of the fact that many companies are spending their budgets inefficiently, wasting money on dated marketing techniques which deliver a very questionable return on investment. A marketing budget of between 5% and 10% of annual revenue should be more than adequate to deliver very reasonable, if not outstanding, year-on-year growth. Here’s the thinking.
Remember The Purpose Of A Marketing Budget
It’s important to take a scientific approach to setting a marketing budget. Create an arbitrary budget, and you run the risk of either under-promoting your business (and failing to attract enough new customers), or wasting precious cash and undermining your profitability. You need to know what amount of budget is reasonable, and you can do that by making some simple assumptions and applying some best practice.
The purpose of your marketing budget is, primarily, to attract and convert new customers. So when setting targets it’s important to remember that a significant amount of your target revenue should come from existing customers. These customers should return to you as a direct result of a delightful customer experience and excellent sales support. You shouldn’t need to invest too much of your valuable marketing budget here. Small-to-medium businesses typically report back that more than 50% of revenue comes from repeat business, so that’s great news for your marketing budget. It isn’t meant to deliver the whole revenue number – it just needs to deliver the amount of revenue that needs to come from new or estranged customers.
What Is A Good ROI For A Marketing Budget?
So just how much new revenue can a marketing budget deliver? Well, research by the likes of Forrester, Gartner and Mckinsey tells us a 10:1 ratio is generally considered to be excellent and 5:1 is considered to be good. In other words, if you invest £100 in a marketing activity, it should be deemed to have been a success if it results in a minimum of £500 of revenue. During my time at Dell, the majority of our Marketing Development Funds came from Intel and, sure enough, every time we reviewed the marketing plan the expectation of a 10x return was always set.
So, armed with some assumptions, we can now have a stab at calculating a “reasonable” marketing budget. Let’s assume our revenue for the past year was £800,000, and our target for next year is £880,000 (i.e. 10% growth). We are expecting 50% of that number to come from repeat customers, therefore our marketing budget needs to deliver £440,000 in additional revenue. We will shoot for a 7.5x return on our marketing investments, which will be somewhere between good and excellent. £440,000 divided by 7.5 gives us a marketing budget of £58,666 dedicated to the acquisition of new and estranged customers.
Customer Acquisition Versus Retention
But let’s not forget those repeat customers. It’s not actually true to say that zero marketing budget needs to be spent on retention. Depending on which industry you are in, and which piece of research you believe, the experts tell us that it is 5 to 25 times more expensive to acquire a new customer than to retain an existing one. So for the purpose of this budgeting exercise let’s err on the side of caution and increase the marketing budget by 20% to account for customer retention (e.g. loyalty programs and promotions). So our budget is £58,666 x 1.2 which gives us £70,400. Which, as a percentage of our current revenues, is 8.8%. That’s well under the average spend, but still a good, chunky number, with which we can no doubt do some amazing things.
There’s lots of assumptions in the above calculations of course, and the actual calculations for any given business will be different, but I firmly believe a marketing budget of anywhere between 5% and 10% should normally be sufficient to drive very healthy year-on-year growth. Certainly if your current marketing budget is less than 5% of your revenue and you are struggling to generate leads and/or attract new customers, then alarm bells should be ringing.
*Gartner 2016-2017 CMO Spend Survey