So the scenario goes…
You’ve been operating like a technician for the majority of your time in business. Maybe you were a barber, a handyman, an attorney, or a CPA, and you’ve been doing the work in the business. Then, you get to the point where you’re sick of having fluctuating amounts of work, barely any extra money left over after expenses, and no one to have your back when you need a day off or vacation.
You realize in order to get this added freedom in your business that you’ll need to scale to step it up on the sales side and ramp up your marketing efforts to stabilize how much leads you have coming in, but you had no idea how much you should be spending on that. There are billboards, internet ads, custom promo items, television interviews, and so many other options for getting your business out there, but you’re confused about which route to take and how much you should be spending.
Small businesses (especially starting from the ground up) rarely know how much they should be spending on marketing. To make matters worse, there’s no set amount that works for every business.
Each business has a different mission, purpose, and rate of growth, so it’s not possible to say the mom and pop shop should spend the same as the Silicon Valley corporation that’s planning to go public. Some businesses are okay with staying small and making enough revenue to cover their expenses and pay themselves a decent wage. The small mom and pop shop is likely to want to spend only a small amount on marketing.
In contrast, the company growing to enterprise level should prepare themselves for a growing marketing budget. Knowing your business plan and putting in place a system sufficient to get you there is very important.
The Entrepreneur Who Wants to Skimp On Marketing
There’s a major contradiction I’ve seen quite a bit–it’s the cheap entrepreneur who says they want an enterprise. They want to reach certain revenue goals, but they don’t want to pay much for marketing.
If they want a logo, they want to find the cheapest designer. If they want a website, they want the cheapest route to get one. When they want to advertise, they don’t want to set aside the necessary funding. Everything they want, they want to get it while targeting the lowest possible price.
Even if you’re doing your own marketing, you’ll find quite a lot of challenges if you’re trying to reach certain goals with the lowest price mentality. Whether you’re an online or offline business, there’s certain products and services you’ll have to buy to support your marketing tasks. Added to products and services, there’s people you’ll have to pay to help provide marketing support.
You may need salespeople to prospect, meet leads, follow up, and close sales. You may need marketing people to increase your brand awareness and inform people about your company. You may need a website, advertisements, tracking software, and the list can go on. The more revenue you want to bring in and the more customers you plan to have, the more your marketing budget will need to scale.
Expert Facts and Stats on Marketing Budget
Here are a few expert opinions on how much you should be spending on Marketing…
On average, companies spend 1-4% (depending on industry) on advertising (Source: Sageworks)
The US Small Business Administration recommends businesses with less than $5 million in sales to spend 7-8% on marketing if their profit margins are between 10-12%. (SBA)
A survey of 168 Chief Marketing Officers revealed that businesses spend up to 40% on marketing, with a median of 10%, and an average of 12%. (Source: Chron)
The image below shows the marketing budget percentage results of a study on 300 Chief Marketing Officers across several industries:
(Image source: Indinero)
Factors To Consider When Making a Marketing Budget
While the statistics are good to look at, it’s also important to consider other factors like…
In various phases of business, you may need to ramp up the marketing budget to increase sales and revenue. For example, in the startup phase where no one knows about you and you have to use marketing to enter the market, you may find you need to spend more than 10% of revenue to build your reputation. You may be buying a website, getting business cards, setting up your brand identity, giving samples, spending more time engaged in networking, and doing lots of marketing and sales related tasks on social media.
In other phases where you’re trying to introduce a new image, change a perspective, or launch a new product, you will likely need to adjust the marketing budget before the revenue spikes.
Business Mission, Vision, and Purpose
Going back to my earlier example with the mom and pop shop in comparison to the startup corporation, there’s a big difference in the mission, vision, and purpose of those two companies. The mom and pop shop may be a local bakery whose mission is to bake the best bread in their neighborhood and whose personal life mission is to make a decent wage to support their family.
In contrast, the corporation business founder may also be a bakery, but his mission is to be an industry leader of all US bakeries. He’s trying to provide enough revenue to pay reasonable wages to himself and hundreds or thousands of others.
There’s a big difference in how much visibility is required to successfully achieve the goal of the mom and pop shop versus the enterprise. Added to that, the mom and pop shop won’t have the pressures of public interrogation and criticism as the enterprise owner. For the enterprise owner, a logo is something that will be placed on hundreds of buildings and websites all over the world, whereas, the mom and pop shop may be okay with getting a simple logo from Fiverr because it won’t have as much detriment to their local reputation.
Some industries will have more competition than others. Some businesses and geographic regions will have more competition than others. Fishermen in Alaska may have more competition than fishermen in Georgia. If you’re competition is taking a large market share and you want to increase your share, you will likely need to ramp up your marketing. If you’re using Google Adwords, you may be competing with higher costs per click and higher percentages of your business revenue. If you’re using flyer marketing, your competitor may be at all of the local trade shows and setting up displays at local markets to gain new business. You will need to formulate a strategy that enables you to compete for market share. The competition may take you higher than normal marketing ranges.
Ultimately, all marketing is to get noticed by ideal customers. Where are your ideal customers? What vehicles will you have to use to effectively reach them? There are costs to reaching customers on all marketing vehicles and the lead generation method you use will influence your marketing budget.
Final Words answering “How much do companies spend on marketing?”
The goal of this article was to answer the question, “How much do companies spend on marketing?”. To conclude, the marketing budget should be consistent with the goals of the business and its growth. You want to think about value instead of price, and consider what tasks will be required to achieve the goals you need achieved. Then, you want to hire the people who can confidently achieve your goals. If you have questions or concerns about this, don’t hesitate to leave them in the comments section. I’d love to help you out!
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Now, it’s Your Turn…
Have you calculated your marketing spend? Do you fall into the 7-8% range or what percentage do you comfortably spend on marketing? What factors influence your marketing spending? Leave your comments and questions below.