When a new client comes to us, they often don’t have a marketing budget in mind. Before we can even begin to establish a quote, we have to work out what a reasonable marketing budget is for them. Only once that’s established can we decide if we’re able to deliver results for them.
There are simplistic revenue versus marketing percentages that you could apply if you just want a rule of thumb amount. However, when deciding on your marketing budget there are a number of variables you should consider:
- What industry you’re in
- Your current position in the market
- How established you are
- How established your product/service is
- The number of repeat customers/referrals you already enjoy
- Your short-term and long-term goals
- Your profitability
What’s in a marketing budget?
Include ALL the costs that go into marketing. This means the cost of your agency, or the cost of hiring internal personnel (salaries, office space, equipment, etc.); website development; design work; printing; subscriptions to services such as social media schedulers and data dashboards; premium stock images; video production; Google Adwords, Facebook ads, Twitter boosted posts; PR work; photography; website hosting; etc.
Planning your marketing strategy
One thing’s for sure. Marketing is an investment in the future of your business. If you don’t properly budget for marketing activity, you are running the risk of your revenue plateauing and growth stalling. Relying, for instance, on word of mouth and your personal network is not a sustainable strategy. Marketing, and content marketing in particular, is a strategy that actually brings improved ROI over time.
When calculating your budget, be aware that this is for a typical year. If you are looking to launch a new product, enter a new market, rebrand your business or make any other significant change, you’ll need to adjust your calculations accordingly.
A simple calculator for marketing budgets
If you’re just looking for a rule of thumb and don’t need to tailor your budget to your own particular situation and goals, you can use the following percentages:
- If you’re an established business and want to keep ticking along: at least 5% of your turnover (gross sales)
- If you want to gain market share or grow in any way: at least 10% of your turnover (gross sales)
According to the Gartner CMO Survey – which collects the opinions of top marketers to predict the future of marketing, track marketing excellence, and improve the value of marketing – here’s how the average marketing budget as a percentage of revenue looks:
- Overall: 11.4%
- B2B Product: 10.4%
- B2B Services: 12.6%
- B2C Product: 13.4%
- B2C Services: 9.3%
Of course, these are only averages. The rate of spending varies wildly from industry to industry and is also affected by company size. Here’s the CMO’s breakdown of sectors:
There are also companies that buck all trends and follow their own rules. One such example would be Salesforce which, despite having a 20% market share, reinvests nearly 50% of revenues in sales and marketing. The rule is, there are no rules.
Calculating your bespoke marketing budget
An alternative, arguably better, way to establish how much you should be spending on marketing is by looking at customer acquisition costs. This is a more personalised way of setting a budget, however, if you take this approach it’s important to base your calculations on your COMBINED sales and marketing efforts. It works as follows:
- First, decide how many new customers you want to acquire over the next 12 months. This number should be realistic – you don’t want to acquire clients too quickly and be unable to deliver. On the other hand, you don’t want to hire extra staff and then never find the clients needed to pay for them.
For the sake of argument, let’s assume you want to find 100 new clients over 12 months.
100 = the target number of new clients/year
- Next, calculate the average value of a client to your company. If a typical client stays for 5 years and will pay on average €2,000/ year, then they bring revenues of €10,000 to the business. If you use a SaaS-type model where you get Monthly Recurring Revenues (MRR), it might be easier to calculate this by dividing your annual revenue per customer by your churn rate.
Let’s say the average spend of a client is €10,000.
€10,000 = the average spend per client
- You now need to work out the profit you’ll make on that customer spend. This is known as the Customer Lifetime Value (CLV). We’ll assume for the sake of my maths skills that your net profit margin is 50% (use your net profit not gross profit, you want to know the actual value of a client).
This gives us a CLV of €5,000.
€5,000 = the Customer Lifetime Value (CLV)
And now, finally, you have the information you need to assign a Customer Acquisition Cost. By acquisition, we mean actual paying clients, not just enquiries. You may get 1,000 leads every year and only 100 turn into active clients, so while the Cost Per Lead is an interesting marketing metric to track, you want to base your budget on paying customers.
A baseline CLV:CAC is 3:1. That would mean your total sales/marketing/advertising costs to acquire one paying customer should not exceed €1,666.
€1,666 = your Customer Acquisition Cost based on a CLV:CAC of 3:1
It’s up to you to decide just how much you’re prepared to spend acquiring a new customer, and factors such as payback period will affect what kind of upfront investment you’re happy with (if it takes 15 years to recoup a CLV of €5,000, spending as much as €1,666 in acquisition will seriously affect your bottom line).
Given your circumstances – your liquidity, the payback period, your industry, your competition, your growth strategy – your own CLV:CAC ratio might be between 5:1 and 10:1, with 10:1 generally being considered the highest you would want to go.
Let’s assume you settle on a CLV:CAC ratio of 10:1. This means you could spend up to €500 gaining each client, and as you want 100 new clients over the year this gives you an annual budget of €50,000.
Match your spending with your expectations of growth
As you can see, there are no hard and fast rules when it comes to setting your budget. If you’re a startup with zero brand recognition, taking on a large competitor or looking to grow rapidly, you’re going to need to put a lot more resources into sales and marketing.
The next step is to track the results of this spending and calculate the efficacy of each channel you try (direct selling, blogging, Facebook ads, promotions, etc.) so that you can eliminate the budget-guzzling activities that don’t bring you any results. We’ll come back to this topic soon!