Your Marketing Budget Isn’t a Category Average

Every year I sit down with more than a dozen companies to work through their marketing budget. The first question that comes up is almost always the same: “what’s the average marketing spend, as a percent of revenue, in my category?” I understand the instinct. Everyone wants a starting point. But after years of this, I’ve come to believe the category average is one of the least useful numbers in the room.

Why the Category Average Is the Wrong Starting Point

A recent article in Harvard Business Review, “How Much Should You Be Investing in Growth?,” tries to answer the question more scientifically. Drawing on a decade of data across 2,900 U.S. public companies, the authors found a different “investment sweet spot” for firms depending on whether they sit in an accelerating, steady-growth, or mature industry. They determined that firms operating outside their own sweet spot can suffer real valuation penalties.

That’s a real improvement on a flat percentage. But it still approaches the question through the lens of category. It doesn’t ask about your firm’s position within that category. It doesn’t ask about your competitive gap, or your brand equity, or how much of the category the leader already owns.

I’ve taken a first run at this question before, arguing that percent of net profit beats percent of revenue as a starting ratio. This piece goes a layer deeper: even a good ratio still borrows its logic from your category instead of your own position.

Category average is one of many starting data points, and honestly, not a very important one. Your budget should come from four things that are unique to you: your goals, your market situation, your resource constraints, and your risk tolerance.

The Four-Input Investment Framework

The Four-Input Investment Framework is Rocketship’s model for setting a marketing budget from your own goals, market situation, resource constraints, and risk tolerance, instead of a category average. It’s the same discipline behind checking whether your marketing has good bones before you build anything on top of it.

Start with your goals. How aggressive are you trying to be? A company defending 40% share and a company trying to build its first 5% are working from entirely different numbers, even if they sell into the same category at the same average spend. Your ambition sets the floor.

Then look at your market situation. How big is the gap between where you are and where you want to be? Gap size includes more than revenue: it’s brand awareness relative to the leader, and it’s how much real access you have to the market, meaning the channels, distribution, and relationships that put you in front of a buyer at all. A company with a wide-open market and no name recognition needs a completely different budget than one with strong relationships but low visibility, even at identical revenue. Building that kind of visibility from nothing is exactly the online-brand-building work a small company has to do differently than an incumbent who already has it.

Then look at your resource constraints honestly. What’s your actual cash position for reinvestment, once you’ve covered what the business needs to run? Are there other capital sources you can draw on beyond operating cash, such as a credit line, outside investment, or a partner, that would let you move faster than organic cash flow alone allows? Most companies only answer this in terms of what’s left over at the end of the year. That’s backwards. It should be a deliberate decision, made on purpose, about how much of your profit pool goes to owners, how much goes to strengthening operations, and how much goes to growth. It’s the same deliberate-not-leftover thinking we push clients through when planning a website budget.

Finally, risk tolerance. Faster growth requires more investment, and more investment means more risk; that part is intuitive. But there’s a second risk that gets ignored: the slow death of underinvestment. A company that plays it too safe for too long misses opportunities and loses relevance a percentage point at a time. Being conservative can guarantee the very outcome you were trying to avoid. Making that call on purpose, instead of by default, is the same human-at-the-center thinking I’ve written about elsewhere.

Put together, those four inputs are what actually sets your number.

Challengers Can’t Invest Like Incumbents, or Like Startups

Once you know your four inputs, the next mistake is building your strategy based on how your competitors actually spend, even the successful ones, because the incumbent you’re chasing is investing under completely different rules than you are. Copying an incumbent’s spread is one of the rookie budgeting mistakes I see most often.

Large incumbents are wired for restraint. That’s not new: Ralph Swalm’s classic 1966 Harvard Business Review study on managerial risk-taking found that corporate managers, as a rule, hesitate to sponsor risky projects, and decades of capital-budgeting research since hasn’t changed that finding much. For a market leader, restraint is often the financially correct move; the aforementioned HBR analysis found that mature-industry firms have a much lower investment sweet spot than growth-industry firms, and pushing past it into extra investment can actually destroy value. The incumbent’s own investors are rewarding it for standing still.

Incumbents also invest to protect their position. Their budget goes toward defending share and maintaining category leadership. That’s exactly why they go broad: a leader with a large, diverse customer base has to speak to all of it, so their marketing spreads across every subsegment rather than committing hard to any one of them.

A startup is investing under yet another set of rules entirely: proving a concept exists, finding product-market fit, and establishing that the thing is real before anyone worries about efficiency and scale.

A challenger brand is a third case. You’re past the point of just proving a concept, and defensive strategies will not drive the level of growth you need. Your goal is stealing share from somebody who already has it. Restraint costs you the very thing you’re trying to win, and going broad is an advantage only available to whoever already has the incumbent’s resources.

Go Narrow, Not Broad

Many challengers get the last piece backwards. Facing a bigger, better-funded competitor, their initial instinct might be to reverse engineer what the incumbent does (match their channels, match their message breadth, match their appeal to every subsegment) just at a smaller scale. That’s a losing bet before you spend a dollar. You will never out-resource an opponent whose advantage is based in ubiquitous brand awareness and channel dominance, and matching their breadth is how you end up sounding like everyone else in the category, the same sameness problem I’ve written about before.

The smart move is going deep instead of broad: putting real weight behind what Adam Morgan (Eating the Big Fish, Wiley, 2009) calls a “lighthouse identity.” This is a clear, specific, unmistakable point of view about who you are and who you’re for, projected with enough intensity that the right buyers can’t miss it and the wrong ones self-select out. You can’t fund that kind of intensity across an entire market. You can fund it in a single, well-chosen segment. That’s the same identity-first logic behind building a winning brand strategy in the first place.

So invest to win that one segment completely before worrying about the rest of the pie. Winning a segment first builds two things a shallow, broad effort never will: a compounding base of proof, and the resource discipline a real challenger strategy requires. Only once that segment is actually won does it make sense to expand the pie, using the credibility and cash flow from that first win to fund the next one. We’ve walked schools through this exact segment-first math when planning their own growth. Outsmart, don’t outspend, as we say; and outsmart starts with knowing exactly where you’re going to fight first.

Frequently Asked Questions

What percentage of revenue should a B2B company spend on marketing?

There’s no single percentage that works across every B2B company, and treating one as a target skips the decision that actually matters. The right number comes from four inputs specific to your business: how aggressive your growth goals are, how big the gap is between you and the category leader, what your real resource constraints allow, and how much risk you can tolerate. Two companies with identical revenue can need very different budgets once those four inputs differ.

Why shouldn’t I use my industry’s average marketing budget as a benchmark?

A category average tells you what every other company in your category has already decided, including companies with a completely different market position, cash position, and growth goal than yours. It masks the exact factors that should actually be driving the number: your competitive gap and your brand awareness relative to the leader.

How should a challenger brand’s marketing budget differ from a market leader’s?

Market leaders invest for restraint and breadth: they defend an existing position and have to speak to every subsegment of a large customer base. A challenger brand is trying to steal share, not defend it, so restraint costs more than it saves, and broad spending is an advantage only a company with the incumbent’s resources can actually afford.

What is a “lighthouse identity” in marketing strategy?

Lighthouse identity is a term coined by Adam Morgan in the book Eating the Big Fish. It describes a clear, specific, unmistakable point of view about who a brand is and who it’s for, projected with enough intensity that the right buyers can’t miss it and the wrong ones self-select out.

How does a challenger brand decide which market segment to invest in first?

Pick the single segment you can win completely with the budget your four inputs actually allow, rather than spreading that same budget thin across every segment the category leader already serves. Winning one segment fully builds proof and resource discipline that a broad, shallow effort never produces, and that win funds the next segment.

Picture your budget conversation a year from now. Instead of opening with what everyone else in your category spends, you open with the one segment you’ve decided to win, and the number follows from that decision instead of the other way around. The failure mode is familiar and expensive: spread your budget across every subsegment the way the category leader does, and you’ll pay for the appearance of a company with real market power while actually funding none of it, chasing a resourcing gap that never closes. If lighthouse identity work is where you’re stuck, that’s exactly what our strategy and branding work exists to fix.

Run our free Grunt Test and see how clearly your current positioning already reads before you set a dollar figure against it.

When you're ready to talk through your four inputs, book a free 30-minute Challenger Brand Strategy Session and we'll help you build a budget from your own numbers, not from your category's.