Commit Percentage of Gross Revenue to Marketing Budget For Growth

Marketing and advertising play an integral role in determining the level of growth and success a company can achieve. Yet, in many businesses, it is often an area that is vastly underestimated, if not completely neglected. When growth is the goal, successful business leaders understand that it is the marketing that will drive revenue, rather than the reverse.

So, would you like to grow your customer base, strengthen your brand, expand market share, increase enrollment in a profitable program, or promote a lucrative product? These objectives don’t necessarily require spending tons of money. However, if the goal is to build a strong brand and achieve growth year-over-year, one thing is clear: An annual marketing plan with strategies and tactics is necessary in order to move goals toward reality. This approach provides a framework in which to plan annual marketing efforts and implement them throughout the year. The key is committing a percentage of annual gross revenue to the marketing budget.

Many companies favor using a percentage of gross revenue as a method for determining a marketing budget because it allows spending to fluctuate as revenue does. The percentage of revenue a business should allocate to its overall marketing budget is not a one-size-fits-all number, but dependent upon several factors. The environment and goals of each business are unique, and determining the ideal amount to allocate to a marketing budget will vary. Factors can include competition of business environment, profit margins, business lifecycle, specific growth objectives, and a host of other considerations.

The U.S. Small Business Administration recommends spending 7% to 8% of gross revenue for marketing and advertising when sales are less than $5 million per year and when net profit margin, after all expenses, ranges between 10% and 12%. Marketing experts typically advise investing 2% to 10% of revenue into marketing, and some suggest up to 20% if competition is high.

For example, a 2014 chief marketing officer (CMO) survey published by the American Marketing Association and Duke University (www.cmosurvey.org), reported averages for marketing investment as a percentage of revenue by business type:

• B2B Product Businesses: 10.6%

• B2B Service Businesses: 10.1%

• B2C Product Businesses: 16.3%

• B2C Service Businesses: 10.9%

The survey found companies with less than $25 million in revenue spent 11% on marketing and companies with $25-$99 million in revenue spent 9% on marketing.

Marketing matters to the bottom line. Without it, a business will see little, if any, promotion or visibility, resulting in slim to no growth. In reviewing a range of mid- and large-size companies, percentages of revenue invested into marketing, and what is gained in return, the results are impressive.

One illustration comes from email marketing company Constant Contact. In 2014, the company invested 38% of its $331 million revenue into sales and marketing. The return on investment (ROI) that resulted was 16% growth over the previous year.

Hugely successful social media companies Twitter and LinkedIn provide phenomenal examples of growth as a result of significant investments in marketing. In 2014, Twitter invested 44% of its revenue in marketing, resulting in 111% growth, while LinkedIn invested slightly less, 35% of revenue in sales and marketing, that resulted in 45% growth.

Companies that are well established may not need to invest such a high percentage of revenue for heavy exposure that may be required for a smaller company. But to maintain market share they do need to continue to invest in marketing efforts.

As the well-recognized brands below further illustrate, their 2014 percentages of revenue invested in marketing and advertising are as varied as the companies that set them.

• Apple:   7%

• Google: 12%

• Microsoft: 18%

• Oracle: 20%

• Salesforce: 53%

A 2014 Gartner Research Study found that companies spent on average 10.2% of their annual 2014 revenue on marketing. In 2010, the Chief Marketing Officers Council surveyed 6000 CMO members to capture a snapshot of the marketing and advertising spending among a wide range of businesses. Survey results revealed that 58% of CMOs spent less than 4% of gross revenue on marketing, 16% spent between 5% and 6%, 23% spent more than 6%, and 2% spent more than 20%. The survey found that 75% of CMO Council members spend on average zero to 6% of gross revenue on marketing.

A strong brand and marketing strategy is a powerful asset. The percentage-of-gross-revenue calculation provides a useful framework in which to determine a marketing budget. This approach also helps ensure you don’t over-spend on marketing, or waste money by spending haphazardly throughout the year. Prioritize your goals and chart out your marketing activities accordingly by month.

No matter the size of your business, the key is to have a marketing plan, work the plan, and watch the plan work for you. —Andrea Young