HOW MUCH SHOULD YOU BE SPENDING ON MARKETING?​

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According to the Small Business Administration and most articles you may find on the subject, the recommended amount a company should be investing into its marketing budget is roughly 8 to 10% of yearly gross sales.  This means a company doing $3 million in annual sales, should be allocating $240,000 to $300,000 per year towards marketing and advertising activities.

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While this is a great starting point, this figure is merely a starting point for thinking about a percentage of marketing allocation that’s right for your business.  This is not a one-size fits all answer.

 

The primary factor in determining your target marketing allocation is desired rate of growth for the next year.  Generally, marketing budgets are determined in December based on current year projected sales.  By early to mid-December, you should have enough data to accurately project your sales numbers for the year and forecast your goals for the following year.  As we shall demonstrate, your marketing budget should be entirely based on meeting those future projections.

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RATE OF GROWTH

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How fast you want to grow has a lot to do with where you should set your budget.  Are you wanting to grow at hyper speed this year or are you content with another year like last year, or perhaps somewhere in the middle. 

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When you create your forecast for the following year’s sales, you are creating your projected growth rate.  If you did $3 million in sales this year and your goal next year is $4 million, your desired growth rate is 33%.  Determining you target growth rate for the following year is crucial to taking a structured and organized approach to your marketing and advertising strategy and budget allocation.

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HYPER SPEED

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Companies that want to grow at hyper speed (30% to 50% year over year) should be thinking about a marketing allocation between 10 and 20% of your gross sales.  In the example above, the $3 million company that wants to grow to $4 million next year is in hyper speed growth mode and should have a marketing budget between $300,000 and $600,000.  For most of you, this might seem like a staggering number.  But growth at hyper speed will require to you scale customer acquisition.  If you’re not able to hustle like a mad man, you’ll need your marketing and advertising to do the work for you.  (More on this in a future article.)

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It is important to note that growing a business at hyper speed means sacrificing money in your pocket today for a greater amount of money in your pocket tomorrow.  If you want to achieve glory, you need to make the sacrifice.  Customers don’t just find their way to you, you need to go get them if you want to grow at a breakneck speed.  The most time effective way to achieve growth at this pace is through aggressively spending on marketing and advertising. 

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REGULAR SPEED 

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Not everyone wants to grow at hyper speed.  For many, the logistics may be overwhelming, or the ambition to take on the added responsibilities that come with hyper growth is not there.  That’s perfectly reasonable, and growth rate of 10% to 20% can be accomplished on a smaller budget of closer to 6% to 10% of top line sales.  In this example, your $3 million dollar business can grow to $3.3 to $3.6 million with a budget of closer to $180,000 or so. 

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With a more methodical year over year growth trajectory, the business owner has more time to build processes, hire and train new employees, and manage the existing team at a more reasonable pace.  This can be useful in maintaining high levels of quality, and cohesiveness within the organization.  There is less pressure to blast the market with every type of advertising conceivable, and you can be more discerning in where and how you spend your money.

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FLATLINE

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We also must consider companies where growth is not a priority.  If you're not actively trying to grow your company, year over year sales probably fluctuate based on economic conditions, and the business owner is content to maintain existing staff and operate more smoothly.  These are usually more mature businesses that have been around for a while, and there’s simply no urgency to increase sales. 

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If this describes you, a marketing budget of 2% to 4% is adequate.  You should understand that some budget is still required to keep from shrinking due to competition, both old competition that you’ve been dealing with for years, and new competition just now entering the marketplace.  So, the $3 million dollar company with no true desire for growth would need to spend roughly $60,000 per year just to keep from falling behind its competitors. 

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If you choose flatline growth, you should be aware that stagnation is always a risky proposition.  You become vulnerable to shifts in the economy, attacks from new competitors, and an overall apathy that can erode the energy required to stay in business.  Beware that the flatline approach is the first step towards inevitable death of a company.  

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CONCLUSION

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In conclusion, you should adjust the sales revenue figure to fit the sales goals of your business and your desired rate of growth , but the percentages hold true.  Follow these guidelines and you can use your marketing and advertising budget to reach your sales goals for next year!