Moments Later: How much should you spend on marketing?

What percentage of sales should you spend on marketing?

Rule of Thumb: I often get asked questions about how much a small to mid-sized company should be spending on marketing. Should it be a flat percentage of sales or some specific dollar amount? Like most things, it depends. But here are some thoughts that may be helpful if you are starting a business and don’t have much experience in marketing.

To get the obvious out of the way, there is no rule of thumb. You spend marketing dollars in proportion to return on investment so the goal is always to spend just enough to meet or exceed your strategic objectives. Averages are averages- so if most B2B (business to business) companies spend 1-2% of sales and most B2C (business to consumer) companies spend 5-9%, you could consider those ranges that others use but they may not have any relevance to your situation. I have experiences spending far more and far less depending on the market, maturity of the product in its life cycle and many other factors.

Although selling and marketing are different activities, some companies combine the two together to get at a percentage of sales. Inc Magazine reported that on average, the companies in the Inc 500 spent on average around 10% on sales and marketing.

Like I said, it all depends.

Here is an example that may be useful to illustrate my point:

Startup: Most startup businesses are either cash-strapped or marginally funded. Those that have a shoe string budget will be hard pressed to find money to market their business. Yet, the single biggest problem most new businesses face is that they don’t think about how they are going to get new customers until they have spent their money on everything else.

The typical example is a restaurant or small manufacturer who has all the equipment needed, the lease is signed, the suppliers lined up--- but they forget about reaching out to customers. Marketing becomes an afterthought. This is a big mistake to avoid.

RECOMMENDATION: A business doesn’t exist without customers purchasing your products and services. Seems incredibly obvious but you must set aside funds to market your company so that once you open your doors for business, the phone (fax, email, etc.) are ringing. In order to determine how much to spend, you have to try different approaches to acquiring new business and measure the results.

If your testing shows that it costs you $50 to acquire a new customer and, on average, they will generate $4,000 in income over 5 years, you need to do some calculations to determine how many customers you need to break even and then to make a profit.

You need to understand your break even point by answering these questions:

If you need to sell X worth of goods and services in the first year, how much can you spend on marketing to acquire customers just to get to a break even point?

What does it cost to acquire each customers? If you spend $50,000 on marketing and you get 100 customers from that activity, how much will each customer spend on average for that year? How long will customers stay with you? What is the lifetime value of a customer? For many of these questions, you need to make an educated guess.

Do the Math: As you can see, this is all a math exercise and you need data to help you assess how much money is needed. My recommendation for start ups or young businesses is to spend an equal time planning how you will acquire customers as you spend on how you will do your work. Whether you are selling insurance, ice cream or eye exams, you need to find a successful method for new customer acquisition. Without it, you are doomed.

“The best marketing advice I can give someone is to sit down with a sharp accountant, financial person or savvy business consultant who can help you understand the math required to make a profit”.

Pro Formas are your friend

When you create pro formas which are estimated profit and loss statements, you start to understand the challenge. For example, your advisor may help you determine that you need one hundred customers a month buying $50 of goods or services every month and you need a retention rate of 80% per year. Losing customers adds to the cost of acquiring new ones.

The question becomes what marketing activity can you do to create this scenario? It may be that you need to spend more money then you have to hit that goal. The more likely question will be that you just don’t know what it will take until you try some experiments with PR, direct mail, print ads, radio, sampling, sponsorship or dozens of other approaches. Marketing for small businesses is about testing and measuring so you know when you have a formula that is working.

I recently had an electrician come to do some work at my house. He told me that the only marketing he does is search so that if someone Googles electricians in Raleigh, his business will show up in the top 3 positions. He doesn't run ads in the yellow pages or local newspapers or any place else. He knows his math and it works for him. By the way, I found him through Google search.

Back in the day: When I started my wholesale bakery business, I didn’t fully understand this concept and I certainly didn’t understand marketing. But I did work with my father who helped me analyze my costs and the expenses involved in acquiring new customers. Dad had gone to Wharton and worked in finance and accounting. As our business grew, we still didn’t have sufficient capital to market ourselves through any third party efforts so we focused on two activities we did ourselves- public relations and sampling. Our costs for these activities were the cost of our own time as well as the direct cost to make the product we sampled. But we tracked our time and our expenses to have some way of measuring what was working and what was a waste of time.

In those pre-Internet days, we found many innovative ways to acquire new customers but the key to it all was to understand the math. I always hated math until I started to see how it fits with marketing.