What Percentage of Gross Revenues Should be Allocated
to the Marketing Budget?
Words
To The Wise™ by David Lamont, Marketingsage
Here's a common question in marketing and
finance circles: What percentage of gross revenues should be
allocated to the marketing budget? It's a good benchmarking
question that can be answered. However, the answer is usually not
a good way of budgeting. The flaws are obvious. If your company
has low revenue, does that mean you invest little (and stay small)?
If you are big, do you invest more than is needed to drive sales
(and reduce profits)?
The question should be adjusted to ask: How much marketing budget do you need to meet your revenue
goals?
You can back into that answer when you have
2 facts about your own business:
- The lead-to-sale rate and
For what they are worth, here are some reported
numbers on sales and marketing budgets:
Sales and Marketing
Expenditure as a Percentage of Overall Revenue (IT Industry)
| Software Average |
20% |
| Microsoft |
19% |
Public Software
Companies |
42% |
| Enterprise Applications |
58% |
| Desktop Applications |
42% |
| Internet Applications |
39% |
| Network Tools |
52% |
Source: IT Marketing Metrics
Guide (2004) by Marketing Sherpa
IT Marketing Budget
Distribution
Field Marketing/Lead
Development |
53% |
Marketing
Communications |
22% |
| Product Marketing |
13% |
| Channel Marketing |
7% |
| Market Intelligence |
5% |
Source: IT Marketing Metrics
Guide (2005-6) by Marketing Sherpa |
Share of 2009 Revenue Spent
on Marketing (Projected),
by Organization Size |
 |
| >> Larger chart |
- The cost of generating a lead.
If the average sale generates $5,000 in revenue and your goal is
to generate $3-million in revenue then you need 600 sales. If you
close one out of every 10 leads (10%) then you need 6,000 leads
to generate 600 sales. If the average cost per lead is $90 then
you need a $540,000 budget to generate $3-million in revenue. Each
sale costs $900. Overall, marketing cost 18% of revenue. This calculation
is simple. However, be careful to use realistic numbers.
First of all you need to consider the value of a customer, not
just the sale. If a customer buys a product for $5,000, can you
now sell more products to them? If you can sell more, the cost of
each additional sale is likely to be considerably lower than the
initial $900. You may find that that customer generates $20,000
in revenue over 5-years for a sales cost of $100 per year. In this
scenario the 5-year sales cost of $1,400 is 7% of the $20,000 revenue
generated by that customer.
The close rate and cost-per lead numbers require you to agree standards
and definitions. The term "lead" is used widely and people's
definitions of a lead differ. Someone selling advertising will often
call a click on a web link a "lead." Sometimes people
may also use the term for mail list opt-ins. It's highly unlikely
that every click or opt-in will meet a salesperson's definition
of a lead. Your chosen definition of a lead will determine the close
rate and cost per lead number.
Your investment in marketing should be adjusted by the following:
- Profit margins
- Minimum costs of participation
- The market stage (early stages vs. late stages)
- The level of competition
- Your product's unique selling proposition (strong products =
lower promotional cost)
- Your product's stage in its lifecycle (launch to harvest)
- Your sales channels
- The value or criticality of a recognizable brand name to customers
- Other factors unique to your situation.
The wisdom of this sales lead approach to budgeting, rather than
percentage of revenue, is that you are focusing on the factors that
actually drive sales and revenue. Your investment in marketing will
always end up as a percentage of revenue, but it shouldn't start
there.
About Marketingsage
Marketingsage is a full service marketing firm that helps other marketers and business executives increase revenue by cost-effectively generating sales leads, building brands, launching products and developing sales channels. With Marketingsage you can add expertise, bandwidth, specialized tools and contacts when you need them, for as long as you need them.
If you think Marketingsage may be able to help you and your business, please give us a call at 925-426-0488 or click here to have us contact you.
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