All businesses should be returning a portion of sales back to business building activities. Here's a good overview for how to calculate your upcoming marketing budgets.
Marketing and advertising budgets are a challenge for many small business owners. Percentage of gross revenue is one of the more popular methods of budgeting because it allows your spending to fluctuate as your revenue changes. In the real world, however, marketing and advertising budgets vary widely based on your industry, competition, profit margins and a host of other considerations.
Marketing by Percentages
The U.S. Small Business Administration recommends spending 7 to 8 percent of your gross revenue for marketing and advertising if you're doing less than $5 million a year in sales and your net profit margin — after all expenses — is in the 10 percent 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. Still other marketing experts counsel a range between 1 percent and 10 percent, and even more depending on how long you've been in business, competitive activity and what you can afford. It's apparent from these differing opinions that the percentage of gross revenue for marketing and advertising depends mainly on whom you ask. They're probably all correct if you know their assumptions.
Real-World Research Revelations
In 2010 the Chief Marketing Officers, or CMO, Council conducted a survey of its 6,000 chief marketing officer members to assess marketing and advertising spending across a wide range of industries. The survey results revealed that 58 percent of chief marketing officers spent less than 4 percent of gross revenue on marketing, 16 percent spent between 5 and 6 percent, 23 percent spent more than 6 percent, while 2 percent spent more than 20 percent. This survey seems to suggest that if you set your spending level between 0 percent and 6 percent of gross revenue, you will be in good company that includes 74 percent of the CMO Council membership.
There's a limit to how much you can afford to spend regardless of what others are spending. Let affordability guide your spending. Then, recognize that certain internal and external factors may cause your spending to fluctuate. Starting a business or introducing a new product requires more spending than spending on an on-going business. Conversely, you may want to reduce marketing spending while you activate your exit strategy if your business is in its twilight years. If you're selling high-ticket, high-margin goods or services, you can afford to spend more on marketing. Likewise, if the competition is giving you a fit, you may have no choice but to increase your marketing spending.
Marketing Drives Revenue
Marketing typically drives revenue rather than the reverse in most successful businesses. Moreover, marketing and advertising spending in most successful businesses is task- or project-oriented. Task-oriented marketing requires a marketing plan, something most marketing experts strongly recommend. The percentage-of-gross-revenue calculation is a useful ballpark gauge of spending parameters. But, you need to be flexible depending on the requirements of your marketing plan. You may be able to obtain specific marketing as a percentage of gross revenue figures for your industry from your industry trade association.