Creating Your Marketing Budget Again? Read This First! — Part 1

This is the first of my three part blog series on creating a marketing budget. I will be publishing a new post on this every Monday.

Here it comes again, the time to set the marketing budget for next year: As regular as Halloween, as painful as a Monday morning, and more argumentative than Brexit.

Only this year at Betsson Group, we’ve gone about marketing budget setting in a fair, holistic, agile yet pain-free manner and I am happy to share the thought-process.

When it comes to marketing budget setting, there are two main approaches everyone’s heard about at business school, and then, a third one I like very much:

1. Top down

2. Bottom up

3. A hybrid approach

I favor the third way and I will share with you why and how you can approach it. Plus, I will even give you a big fat tip that makes CMOs and CFOs love each other (yes, really!).

This is the first of my 3-part blog series that will break apart each of these marketing budget approaches to hopefully help you as you create your marketing budget for next year. Enjoy!

Part One:

Top-down — The “Do What You Can with THIS?” Approach

A common approach to budget setting is Marketing Budget Ratio (MBR), meaning that the marketing budget is a set percentage of the company’s accounting revenue. Simple enough, it sounds.

First question: What percentage of the overall revenue should the marketing budget represent?

According to a 2014 Gartner Research study, “companies spent on average 10.2% of their annual 2014 revenue on overall marketing, with 50% of companies planning to increase [in 2015] to an average of 10.4%.”

Ten percent — the magic number you will likely hear whenever you ask how much of the revenue you should spend on marketing. But is that true for everyone? What about a company in its growth phase like Eventbrite vs. a well-established brand like Apple? Is 10% really the magic number and if so, what does a 10% investment in marketing get you in ROI?

Small to mid-size companies:

The U.S. Small Business Administration recommends spending 7 to 8 percent of your gross revenue in marketing and advertising if you’re generating less than $5 million a year in sales and your net profit margin — after all expenses — is in the 10 to 12 percent range. Some marketing experts advise that start-up and small businesses usually allocate between 2 and 3 percent of revenue for marketing and advertising, and up to 20 percent if you’re in a competitive industry.

According to a 2014 CMO survey published by the American Marketing Association and Duke University, companies with:

● Less than $25 million in revenue spent an average of 11% on marketing

● $25-$99 million in revenue spent an average of 9% on marketing

The study also broke down the 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%

According to IDC, the average ratio for companies earning less than $250 million in revenue is 9.1 percent, and the weighted average is 6.4 percent.

Now, there are three things to note about these numbers:

1. They are the average of large tech companies in mature markets; as it happens, this average is lower than the one required for smaller, younger, fast-growing companies.

2. This ratio varies depending on gross margin and level of competition within each industry and your ambition for year on year growth. If you use the MBR when planning your marketing budget, compare it to companies similar in size, maturity stage, industry, competitive environment and ambitions for growth to your company.

However, for larger companies consider this:

In 2014, Microsoft, Cisco, Intel, Salesforce, LinkedIn, Marketo, Tableau and Twitter had marketing and sales budgets that were greater than 14% of revenue, some spending as much as 50%! All of these companies also grew year-over-year.

So, does it pay off?

Twitter and LinkedIn invested heavily in marketing and sales in 2014 and were generously compensated. Twitter saw 111% growth with a 44% investment in sales and marketing. LinkedIn invested slightly less, with 35% of revenue going towards sales and marketing, but still saw a healthy return of 45% growth year-on-year.

While they clearly have the revenue, do these established brands need to keep investing in marketing? The answer is yes, just not as aggressively. As Horace Dediu, founder of independent research firm Asymco and a former Nokia business development manager said in a Reuters article, “The stronger, more differentiated the product, the less it needs to be propped up by advertising [referring to Apple’s ad spend].”

Company size has an impact as well. Enterprise corporations spend the highest percent of their budget on marketing, 11%, while smaller companies spend less at 9.2% on average. And companies with aggressive ambitions who plan to outperform their competitors invest the most, with 13.6% of overall revenue on budget.

Lastly, there are three exceptions to the rule of marketing budget as a percentage of revenue. Any one of these three components can result in spending less on your marketing budget:

1. Product Superiority — Your product is so good that consumers and the media invest their time and energy without impacting your budget.

2. Affiliate Superiority — Instead of paying for marketing, you provide discounts rewards to your customers who invest their time and energy. While it’s not an expense, it is a reduction in revenue.

3. People Superiority — This could translate into a well-known CEO who is asked to speak everywhere, providing incredible public relations opportunities without the necessary budgetary investment. Or it could mean your marketing team is so skilled the outstanding creativity as well as the impeccable execution of their campaigns make up for a lower media investment.

So there you have the landscape of the top down approach. Coming up next? You guessed it, my perspective on Bottom Up!

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