5% of what?
You will need a simple system to work this out, and make a decision yourself, rather than just using an arbitrary percentage as recommended in many of the articles on this topic.
If you’re already running a business, or starting one up and have no revenue, reading an article that recommends you spend 5%, or any other percentage, of your revenue on marketing is not going to be helpful.
Google is obviously not infallible when it comes to helping you make good decisions about your business. You need a better way to figure out the most appropriate numbers for yourself.
When I last ran the search on the question of ‘how much should I spend on marketing’, the results gave me a range of estimates and rules of thumb.
The recommendations depended on the type of business, whether small, B2B, startup, highly contested consumer goods, current revenue and whether your business is in maintenance mode or growth mode.
Estimates included 2-3%, 10% of gross profit, 12-15 – 25% of top line revenue (gross profit), some suggest net profit, some the word resources. All hedged their bets.
Some of the articles were about the advertising spend. Confusing publicity and advertising with marketing. Marketing to me being the planning and decision making, including staff or time spent on this work ( marketing, sales staff, marketing support and their needs ). Publicity and advertising being the promotional component of the marketing plans to bring in leads or sales. This includes the tactics and implementation of the marketing decisions. Together they make up your marketing spend, and counted properly takes up a good, but critically important proportion of your revenue.
The terms marketing, publicity or promotion, nowadays seem to be used interchangeably. Further muddying the idea of how much to spend.
I really think someone plucked that number out of the air and others have just parroted it.
It provides no basis for making a decision on your marketing spend.
Terminology is also mixed up and made confusing by using revenue figures such as gross profit, net profit, above the line, or total resources.
You and me too.
5% of what?
Let’s agree to start with total revenue before any other expenses, including taxes, are deducted.
If you are a start up business you may have no revenue. Suggesting you spend a percentage, even 5%, on your marketing is being silly.
Basically it means 5% of nothing.
And that is useless.
How much to spend depends on your business and how well you are going
Unless you have some sort of funding to start up, and cover your operational expenses, your total business spend comes out of your own pocket, credit card or a bank loan.
This is bootstrapping.
How much you spend on your marketing and promotion needs to be aligned to your revenue targets, and what your product, or product mix is.
Naturally with no funds, or a low budget, a lot of the work is going to be sweat equity = your time and using whatever resources you have at your disposal to build up your revenue.
Lets rough out a bit of a business model to give us some way or working things out.
A simple model might suggest guessing (and that’s what most projections are-best guesses) a revenue target, something like:
1. Revenue pa = $100 000 ($100k)
2. The total cost pa to make or buy the products you sell, say $50 000 ($50k)
( this could involve purchasing a product to resell, making it yourself from scratch, your labour and any other resources used to create the product, a digital product will change these numbers too )
The money left after your cost to make or buy is your margin. In this case $50 000 or 50% of revenue. But that doesn’t mean you can crack out the champagne if you get there.
You need to spend some money to make that revenue, and that’s where your marketing, sales and promotional spend becomes important and can’t just be a percentage plucked out of the air.
Calculating your margin
Let’s assume it costs you to make or buy your product $500, and you can sell it for $1000.
Your margin is $500 = $1000-$500.
Sell 100 products for $1000 each and you get $100k.
On these numbers you only have to sell 2 products on average a week over 50 weeks.
2 x $1000 x 50 weeks = $100k
This leaves the business with a balance of $50 000 to spend on running the business, including the costs of:
Marketing and selling (marketing staff, costs, publicity, sales calls, shop front, website etc)
Administering the business, and hopefully leaving a
profit after all expenses are paid for.
However, a startup having no revenue will need to best estimate how much might need to be spent initially to earn the revenue.
Estimate this from the margin. If it is a real 50% margin, and you expect to turn over $100 000, and are very careful with your spending, you might spend 25% or more, of your revenue on your marketing, publicity and sales ie. $25 000. Or you might choose to spend a lot more to get things moving faster, forgoing any profit and wages in the first year or so.
If we followed the 5% rule it would mean, using our $100k guess, spending only $5000 pa or $100 pw.
That’s clearly nonsense and wouldn’t even pay for a good website, content marketing, digital marketing or the even the time involved.
Established Businesses Marketing Spend
For established businesses, the spending has to come from revenue, retained earnings or borrowings, depending again on margins and the size of the business.
A larger business may already have a marketing manager and sales staff. Or it may just have a manager or owner, sales staff, a shop, or an online store along with digital marketing platforms. These are already drawing on marketing funds. With a new product the established business is in the same boat as a startup. Although they may have the advantage of already having staff and systems in place. They will still need to allocate money for marketing and promotion.
Obviously every business is different. And where your business is on the scale of starting up, growing or thriving is going to be important in terms of how much funds can be allocated to funding your marketing. Simple percentage recommendations are pretty useless as far as I am concerned.
However, it is important to know what you are spending as a percentage of total revenue on all your marketing costs, including promotions and advertising. This will give you some idea, a best guess, about how much you might want to spend on your marketing. Better than just some arbitrary percentage figure.
Knowing these numbers will tell you the correlation between your marketing and revenue.
For without marketing and sales, there is no revenue. Spending little or nothing on marketing can be a recipe for disaster.