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:

  1. The lead-to-sale rate and
  2. 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.