What Size Marketing Budget do You Need?

Quite often, on meeting a CEO or founder of a small company the conversations have frequently gravitated toward marketing budgets. Specifically, what is the right size of a marketing budget for a growing company? Having started and grown several marketing teams as the first marketer, up to large scale-up organizations - I have seen a few iterations. But, much as I hate to offer a 'wishy-washy' answer, it really does 'depend' on your business - within certain boundaries.

Marketing in Tech

My background and experience has been within the B2B high-tech marketing space. This both for the mega-large corporations like IBM, Ericsson, HP, and ADP; and for small start-up and scale-up businesses. Through these variations a good general rule of thumb has been that your marketing budget should be 10%-20% of the company's gross revenue target. This rule of thumb being for businesses on the growth end of the spectrum, in high-tech. Where on this spectrum you lie depends on your revenue growth expectations. Established companies with a significant brand presence like HP, require less relative spend on marketing to garner the same attention as small brands, for example.

Marketing Budget Looks Forward

Remember that your marketing budget is a forward looking analysis. A marketing plan outlines your marketing investments. It is designed to build brand awareness, or demand generation to hit a future sales target. In association with this, make sure you understand how long it takes to close a deal. This will help you understand how far ahead you must peer.

As an example, a sales cycle for an enterprise sized deal in the B2B SaaS space may be 12 months. This is not uncommon for enterprise level B2B SaaS deals worth $100,000US or more. This young company targets an aggressive growth plan to increase sales by 50% surpassing $20Million US by year end. So, being aggressive, estimate a budget of 15%-20% of year-end sales revenue. This suggests a $3M - $4M US marketing budget.

Truthfully, this is a very broad swath. But, our rule of thumb gives us a starting range. It focuses the conversation on how aggressive a position the CEO wants to take.

For growth companies, an important take-away is not to make the marketing budget a look-back function. Don't budget your forward marketing spend based on sales revenue achieved in the past 12 months. For established, low growth industries this may be an acceptable practice. But, if you are in a high growth, or high-tech business, don't give in to this easy temptation.

CMO Survey Benchmarks

Moving beyond rules of thumb, you want to know what other marketing budgets are like driving other marketing strategies. An excellent resource is the CMO Survey which sampled 2,654 marketers at 'for-profit' companies throughout the US. The latest survey was completed in Jun 2020, during the COVID-19 pandemic crisis.

Respondents were asked about the size of marketing budget their firms had compared to the overall companies' spend (overall budget). Interestingly, during the pandemic marketing activity spend as a part of the overall budget, grew from 11.3% in February 2020, to 12.6% in June 2020. Whether due to cutbacks in other parts of companies, or from a growth in marketing campaign spend to curtail the downward spiral of demand... budgets rose relative to other areas.

Marketing Budget vs Firm's Revenue

Compared to the company's overall revenue, the CMO Survey also found an increased share of marketing expenses. The graph below shows the marketing budget rise from 8.6% of a company's revenue in February 2020 to 11.4% in June 2020. This being an average across all survey participants.

Again this rise possibly being the result of increased marketing goals with associated growth in budgets. These may have been the result of efforts to curtail drops in demand. Alternatively, it could represent stable marketing budgets, compared to drops in incoming sales revenue.

Marketing Services by Economic Sector

Another cross section of the data looked at the different between business-to-business (B2B) and business-to-consumer (B2C) trends. For both product and services oriented companies, B2B budgets ranged in the 8.3% - 12.0% of sales revenue. B2C budgets were more robust in the 13.9% - 15.0% range.

Marketing Budgets by Industry

Most useful from the CMO Survey research is one graph detailing the marketing spend as a percentage of the company's revenue, broken out by different industries. It captures the variations across businesses and market areas. Connecting these results back to my initial rule of thumb, we see that marketing budgets in the high-tech and software sectors averaged out to 9.7% of revenue.

Keep in mind that these figures are averages. To use them appropriately, think first about what you wish to accomplish within your own company. Then also realize that the budget will range commensurate with your growth strategy. As an example, Frog-Dog (a marketing agency) recommends 10% as a rule of thumb for growth oriented companies. They also suggest that "retail, consumer products, and pharmaceuticals—often spend 20 to 50 percent of revenue on marketing certain offerings." So, use these figures are reference points to help guide your budgeting discussion, but don't treat these as sacrosanct. For high-growth or hyper-growth companies - double the figure.

What Size of Marketing Budget do you need?

Whether your spend is on email marketing, social media positioning, content creation, virtual events, syndication, or search engine ads - you will need a budget. To create your marketing with impact, that achieves your corporate goals, you need the right level of funds. First, remember that you are budgeting for the future. Don't merely look at the level of revenue you achieved in your previous year. Also, don't just think along the lines of duplicating your previous year's marketing budget.

Instead, use a look forward budgeting calculation - that adjust to where your sales revenue are heading. Ultimately, marketing is there to make the sales targets achievable through branding, demand generation, and so on.

For varying industries, use an excellent resource like the CMO Survey quoted above. It is an excellent guide developed by the Fuqua School of Business, Duke University in collaboration with Deloitte, and the American Marketing Association. It is a free resource (not even gated), with a wealth of information. With gratitude, take advantage of this generosity! Then build the right marketing budget that guides your company to success!