7 Benchmarking Questions To Consider When Establishing a Marketing Budget

What’s the Right Size for Your Marketing Budget? 

One of the first questions clients ask is what the appropriate spend or budget should be for marketing. The quick answer is a target of between 3 and 8 percent of a company’s overall sales – with 5 percent often cited as the norm based upon a review of a range of benchmarking and peer group studies.

What can influence the size of the marketing spend are factors like the competitive landscape, the aggressiveness of a company’s marketing objectives, a significant new product launch or a desire to enter a new market.

Compared to other functional budgets, the marketing budget is unique in that it must allocate to both strategic, longer term; and tactical, nearer term elements.  For example, a balanced budget will include both investments in VOC (voice of the customer) and other innovation focused activities that have a longer term payoff, and more immediate, demand generating activities like SEO, trade shows and sales collateral.

One of the most significant changes impacting marketing effectiveness over the past decade has been the advent of tools that allow us to more accurately measure the ROI of marketing spending, particularly in the areas of digital, search-engine marketing and pay-per click advertising. According to eMarketer, companies will spend upward of $50 billion on digital marketing in 2014 – continuing a five-year trend of explosive growth in the segment.

There are three areas that comprise the mix of marketing spend: Product marketing, marketing communications — sometimes known as marcom, brand building or advertising, and channel marketing — sometimes called sales support.   Within each of these groups, what is, and isn’t included, can be debated.  Some questions include:

• Should trade shows be a sales or marketing expense?
• Is co-op advertising attributed to a cost of goods sold line-item, sales expense or marketing expense?
• Is voice of the customer a product development or marketing expense?

Some would even argue that the cost of the sales force is a subset of the marketing budget, as we could eliminate the sales team and shift to all online demand generation or buy a Super Bowl ad! I will leave that debate for another day.

In considering the optimal marketing budget size and mix of spending, I use these questions to help develop a plan:

1. Does the firm have significant growth opportunities? (I believe most firms do, even in mature industries).  If so, investing in product development, customer intimacy or demand generation at a level beyond my industries average can help accelerate growth.

2. Are the investments competitors are making in the three identified areas of marketing: product marketing, marketing communications and demand generation, above or below our spend? At a minimum, understanding how marketing budgets are being allocated in your business category (as an example, take a look at the Marketing Sherpa chart at the end of this blog) can be insightful.

3. Where are our products in the product life cycle? Smaller companies who are still on the growth curve of their life cycle typically bump their marketing spend by 50 percent or more (as a percentage of revenue), according to studies by Marketing Sherpa, Forrester and eConsultancy.

4. What is the price elasticity and pricing leverage in the market? Do we understand the dynamics of pricing, and are we optimizing price on each deal? Would there be a payoff if we had a greater focus on pricing, both strategically and tactically?

5. What ROI have we seen on pay-per-click (PPC) and other digital lead generation activities? A good CRM system, such as SalesForce.com or HubSpot, allows you to calculate the value of leads in terms of sales and margin, and the effective cost per lead based on lead yield.

6. Who is truly generating demand and preference for your products?  If you are a challenger brand looking to overtake your competition, or simply struggling to gain your own unique share of voice, you’ll need to consider a greater investment than merely placing a product with distributors.

7. Would we be better having one generalist in-house, or outsourcing to several agencies that are specialists and can provide expert advice in each area?

Having applied the above analysis to our business at Chief Outsiders, we have set our total marketing spend at a level above 10 percent.  For us, the key criteria that led us to that decision include:

• Large opportunity to continue to grow
• Low awareness among our target market
• Proven ROI from our marketing investments
• A long sales cycle that benefits from continued outreach with fresh content insights

At Chief Outsiders, we are constantly measuring the effectiveness of our investments in both online organic and paid ads and more traditional networking and sponsorships.  In today’s environment, dynamically allocating spend based on results and costs ensures us the best yield on our investment.

It’s important to make sure your budget is keeping pace with what the competitive landscape is demanding. In a recent CMO Survey conducted by the Fuqua School of Business at Duke University and the American Marketing Association, more than half of all businesses surveyed indicated their marketing spend will increase during the next 12 months.

A study by Forrester Research pinpointed the increase in marketing budgets at 6 percent for 2014. In considering how to size your marketing budget, also ensure you are being ruthlessly effective. According to Digital Sherpa, improving the impact of your marketing communications, both in your approach and execution, can “significantly impact marketing effectiveness without a big increase in resources.”

What has been your experience with setting your marketing budget and marketing spend mix?

Suggested Resources:

1. Curata.com: Over 70% of Marketers Plan to Increase Spend on Content Marketing in 2014 (Press Release)
2. MarketingSherpa.com: Marketing Research Chart: Tactics that are seeing a budget increase (and decrease), by Daniel Burstein.
3. eMarketer.com: Direct-Response Tactics Take Majority of US Marketers’ Budgets, by eMarketer.com
4. Brainrider.com: 2013 B2B Marketing Budget Planning Tool
5. PepperGroup.com: 2014 B2B Marketing Budget Benchmarks, by George Couris
6. TheCMOSurvey.org, August 2013

Richard Browne is a CMO and partner with Chief Outsiders, providing interim Chief Marketing Officer services to clients nationally. Richard’s strategic marketing consulting focuses on helping midsized B2B and B2C firms develop strategic marketing plans and effectively implement the resulting positioning and tactical execution. Follow Richard on Twitter @JRBrowne or on Google+. Contact him at rbrowne@chiefoutsiders.com . His latest e-book, Tips and Tales from the Marketing Trenches, provides pragmatic advise for CEO’s looking to increase their companies marketing effectiveness in the areas of pricing, product strategy and customer growth.

He is also Professor of Practice in the MBA program at the Bryan School, University of North Carolina Greensboro where he lectures on business strategy. 

Chief Outsiders’ blog is written by top CMOs and executive guests for CEOs looking for business growth strategies, current thinking on effective leadership skills and ideas and insights from real-world marketing strategy implementation.

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