How Much Should I Spend on Marketing?

Small companies face a constant challenge when trying to determine how much money they should spend on marketing. Business leaders understand the importance of having a clearly defined sales and marketing strategy and recognize that alignment on budget is crucial to planning, but oftentimes they have no idea where to even start when considering the marketing spend.

There are many different methods and techniques to approaching marketing, but it’s important to fully understand the return on investment to justify the cost. So, how do younger and emerging companies determine how to best allocate their marketing budget?  And, how do small companies that are pre-revenue generating track the return on their marketing investment?

After you establish an approach to fill your sales funnel and determine how you will measure the cost of marketing, then you can tailor your plan to ensure that you get the best return on your investment. To get started, let’s first cover a couple of terms and definitions that you will need to understand when calculating your marketing spend:

Marketing Budget Terms and Definitions

Marketing Funnel	The flow of how prospects move through the sales process from initial interest to purchase.
Customer Acquisition Cost	How much money you spend to acquire a new customer
Lifetime Customer Value	Amount of revenue that you expect to earn from a single customer over the life of your business
Monthly/Annual Recurring Revenue	How much money your customer is billed on a monthly or annual basis
Conversion Rate	The percentage of people that enter your marketing funnel that become paying customers (usually 1-2%)

Typical Marketing Mix:  Inbound vs. Outbound

A typical marketing mix for a small- or medium-sized business consists of a few main elements that fall in either inbound or outbound marketing categories. Inbound marketing includes website, email campaigns, social media, blog, forums, pay-per-click, search engine optimization, videos, demos, and webinars. Outbound marketing includes traditional marketing and advertising techniques such as inside sales, print and online advertising, direct mail/collateral, trade shows/conferences/seminars, cold calling/telemarketing, and public relations. Some of the most effective marketing tools are also some of the most cost economical. For example, your company website and social media platforms (Facebook, LinkedIn, Twitter, Google+, blog, etc.) are much cheaper to implement than traditional marketing such as a billboard advertisement or a television commercial. Both inbound and outbound marketing methods have their advantages and disadvantages, so it’s a good idea to blend both into your marketing strategy.

Inbound Versus Outbound Marketing Strategies

Inbound Marketing	Outbound Marketing
Company Website	Inside Sales
Email Campaigns (third party)	Email Campaigns
Social Media/Blog/Forums	Print and Online Advertising
Pay-Per-Click	Direct Mail and Collateral
Search Engine Optimization	Trade Shows/Conferences/Seminars
Video/Online Demo/Webinar	Cold Calling/Telemarketing

Measuring Customer Acquisition Costs

After you have conducted research on your target audience and identified the best methods to connect with them, you can begin to evaluate the efficiency of your approach by determining the actual customer acquisition cost (the cost to acquire a new customer by introducing your products and services). You will need to have a basic understanding of lifetime customer value, monthly/annual recurring revenue, and conversion rate (refer to definitions in table above) and a plan to track marketing costs that feed your marketing funnel.

Customer acquisition costs (CAC) can be calculated by taking the cost of sales and marketing over a given period and dividing that number by the number of customers acquired during that same timeframe. Lifetime value of a customer (LTV) is determined by the gross margin that is expected over the relationship lifetime (also consider costs associated with installation, support, and service).

Calculating a Marketing Budget

According to research by Gartner (with information gathered from both B2B and B2C companies), in the Key Findings from U.S. Digital Marketing Spending Survey, 2013, there are several ways that companies calculate a marketing budget. One way is the percent of sales method where companies typically spend 5-7% of their overall sales. Another method is to calculate the percent of total budget in which new businesses usually spend 20-30% in the first two years and then scale back to an average of 7-10% annually. Gartner reported that in 2012, companies on average spent 10.4% of their annual revenue on marketing activities and they expect that their budgets will increase by 6% in 2013.

According to the U.S. Small Business Administration, “Many businesses allocate a percentage of actual or projected gross revenues – usually between 2-3% for run-rate marketing and up to 3-5% for start-up marketing.” But the allocation of marketing budget for small businesses depends on several factors including industry, size of business, and growth stage. They also state, “As a general rule, small businesses with revenues less than $5 million should allocate 7-8% of their revenues to marketing.” Furthermore, they clarify that the “budget should be split between 1) brand development costs (which includes all the channels you use to promote your brand such as your website, blogs, sales collateral, etc.), and 2) the costs of promoting your business (campaigns, advertising, events, etc.).” The suggested budget percentages are based on margins from a healthy business between 10-12% and a strong business margin at 15% (after expenses including marketing), so if your margins are lower than that, they suggest allocating additional funds to marketing. We recommend that you think long term when developing a marketing budget; plan on lower margins for the short term but a higher return in the long term.

Adjust to Your Audience

Once you have identified your target audience and tailored your marketing activities to how your audience best reacts, you can begin to monitor the response and shift tactics as necessary. One of the greatest benefits of being a smaller company is the ability to be nimble and adapt to market changes. If you find that a particular marketing method is not as effective as anticipated, you can easily try another technique. And, by keeping a close eye on your marketing spend, you can reallocate funds appropriately as you react to how your audience chooses to engage with you. The ultimate goal should be to increase your marketing return on investment by reducing the cost of customer acquisition. Stay focused on increasing the number and quality of leads for each dollar spent on marketing.

Need help determining how to best allocate your marketing budget and maximize your ROI?  Contact Launch Marketing today!  Be sure to follow us on Twitter or like us on Facebook to keep up with the latest B2B marketing tips and trends.

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