How Much Should I Budget for Marketing?
Here are three questions to help you hone in on the right answer for your company: (1) How fast do you want to grow? (2) What is your cashflow situation? (3) What is the expected marketing ROI or ROAS (return on ad spend).
How Aggressive Are Your Business Growth Goals?
First, when the primary strategy is growth, a company can justify spending more aggressively on marketing — even up to all of its free cash flow (many tech startups even spend more than 100% of their profits using leverage and equity investment, in order to establish market leadership). Rapid growth tends to take heavier investment, because in most cases you will need to buy reach and use external resources. Less aggressive growth strategies, defensive strategies, long term brand building, can often be done more organically, and with reduced external support.
What Cash Resources are Available for Marketing Investment?
The most common question asked on Google search related to marketing spend is, “what percent of revenue should be spent on marketing.” This is really the wrong question on a couple levels. It treats marketing as an expense rather than a strategic investment. Understanding the relative investment levels on discretionary spending is important. But the better question is, what percent of net profit or value created should be spent on marketing. And then, what rate of return is expected compared with other options such as investments in tools and technology, training, or any number of measures that may impact profitability.
The % of net profit is so much better than % of revenue is obvious. A company that sells commodity products through retail, for example, might have margins less than 10 or 15%, whereas a differentiated service offering may have margins of 50% or higher. So a 20% of revenue marketing investment in the former scenario would result in negative cashflow, whereas in the latter 20% might be sustainable. If you have a good understanding of your monthly cashflow, you can choose how much to invest into marketing based on how aggressive you want to be, and opportunity costs associated with not investing those earnings in other areas.
What is the Expected ROI of Your Marketing Program or Campaign?
Third, it depends on the return on investment. Many forms of digital marketing allow for precise return on investment calculation. We launched a PPC campaign recently for a client promoting an online training program that is delivering new students for about $50 each, with a net revenue per student of $600. If you have that strong of ROI, and have the fulfillment capacity, then % of revenue or even % of net profit/value isn’t relevant. Quite frankly you should do whatever it takes to maximize that channel, even if it means using a line of credit to cover the short term cashflow needs.