You should plan to invest 5-25% of your revenue on marketing, depending on if you want to sustain or grow. Learn why from the experts at a top 3% digital marketing agency.
Factors that determine your marketing budget percentage of revenue:
- Business goals
- Company size
- Brand maturity
- Market competition
- Economic climate
- Product/service lifecycle
- Marketing channels used
Is your marketing approach more of a gamble than a strategy? Marketing without a clear budget leaves the door open for overspending and unnecessary revenue loss. Cue the violin shrieks from Alfred Hitchcock’s ‘Psycho.’
Smart business owners know the secret to an effective marketing strategy: strategic allocation of revenue invested in marketing. Curious about what percentage of revenue should be used on marketing for your business?
Here, Sam Yadegar, CEO of HawkSEM, delivers expert advice on marketing budget estimates and how to balance your profit margin with your marketing goals for ultimate return on investment (ROI).
How much revenue should I spend on marketing?
Your marketing budget needs anywhere from 5-25% of your revenue to thrive. Generally, 5-10% is enough to sustain, but you’ll need 15-25% into data-driven marketing campaigns to grow.
Campaigns can span digital marketing, traditional advertising, outreach events, tools, technology, in-house marketing team salaries, and agency services.
That said, arbitrary spending reaps minimal rewards, if any. To truly drive results, you’ve gotta spend wisely.
Unless you’re a new startup without revenue or capital, you’ll typically dedicate a portion of your total (gross) revenue to your marketing initiatives. How you allocate marketing funds can vary according to a few different factors.
Factors that determine your marketing budget percentage of revenue
Your days of throwing money at marketing and calling it a strategy are over. If you want a marketing plan that delivers measurable results, you need to be a bit more calculated (pun intended) than that. This means diving deep into the operational framework of your business.
Here’s what to consider when you crunch the numbers:
- Business goals
- Company size
- Brand maturity
- Market competition
- Economic climate
- Product/service lifecycle
- Marketing channels used
These components are essential for shaping a tailor-made marketing budget.
Ready for a closer look?
You can’t define a marketing strategy without first defining your objectives.
Do you want to increase your market share? Enhance brand awareness? Attract new customers? Get super clear on what you want your marketing to achieve. Then, translate those goals into key performance indicators (KPIs) so you can strategize your marketing budget and measure your strategy’s progress later.
The more aggressive your goals, the more revenue you’ll need for your marketing budget. A good rule of thumb, according to Yadegar? 5-10% to sustain and 15-25% to grow.
At HawkSEM, we’re all about data-driven decisions. Here are Yadegar’s go-to KPIs for marketing success:
- Cost per conversion
- Number of conversions
- Lifetime value of conversions
For example, if your cost per conversion is too high, put more money into channels that produce better results.
Here’s the best part: Yadegar says you don’t need to harness these metrics all on your own.
ConversionIQ, (our proprietary tech for marketing data centralization and optimization), keeps tabs on all your vital metrics and helps you calculate your budget to maximize return on ad spend (ROAS).
Now, that’s the kind of marketing tech that pays for itself.
Average marketing budgets vary from industry to industry.
According to a survey by Deloitte, some benchmarks for marketing budget percentage of revenue for different sectors are:
- Banking & Finance: 8%
- Communications: 10%
- Consumer goods: 9%
- Consumer services: 6%
- Education: 3%
- Energy: 1%
- Healthcare: 18%
- Insurance: 8%
- Manufacturing: 13%
- Mining and construction: 3%
- Real Estate: 14%
- Retail wholesale: 8%
- Service consulting: 21%
- Technology: 21%
- Transportation: 6%
Only 3% for construction and 21% for technology? While it might warrant a double take, factors like regulations, competition, spending patterns, and customer acquisition costs (CAC) influence each niche. Therefore, each one needs a unique approach to marketing.
Think about the healthcare space. This industry is filled with complex offerings, regulations, and sensitive health decisions. That means its marketing has to prioritize education and trust, which usually means more resources.
Brands in this industry also face fierce competition, which calls for more substantial marketing activities, like larger-scale awareness campaigns that boost brand authority even if they don’t result in as many conversions right away.
We know what you’re thinking—finance is just as competitive, regulated, and sensitive. So, why the stark contrast? Simply put, it’s the nature of the industry.
Banks and finance institutions tend to have a solid customer base. And their regulatory constraints, while also rigid, can limit the scope of their marketing efforts.
Another deciding factor: how big is your brand?
The size of your company also impacts your ideal marketing budget percentage of revenue.
It’s only natural that larger, more established enterprises (like Target and Google) have seemingly limitless marketing budgets. In contrast, small businesses and startups tend to have expense constraints.
So, what’s a good baseline? The U.S. Small Business Administration says typical marketing spending for profitable businesses making less than $5 million in sales annually is about 8% of the total revenue. Some new companies start with just 1-3%.
The point is everyone’s gotta start somewhere—right?
For mid-sized brands and industry titans, there’s more wiggle room with marketing spend. Mid-sized businesses generally invest around 10%, while larger enterprises start at about 15%.
It’s no secret that geography affects product and service pricing, but did you know it sways marketing costs, too?
That’s right—marketing costs are not universal, even if they’re digital.
Take pay-per-click (PPC) marketing, for example. Even when it comes to the same product or service, your ad costs can differ drastically depending on where you’re targeting.
According to a recent study, Florida and Texas boast the highest ad costs, particularly in niches like real estate, online learning, and insurance.
Geographic factors that affect marketing costs
There are a few reasons for these variances:
- Competition: If many brands target the same keywords and audience, costs per click can increase
- Audience: Marketers are willing to spend more to reach higher-income regions, therefore click costs may rise
- Ad relevance: Ads that are highly relevant to a specific audience get more clicks, therefore they have a better return on ad spend (ROAS)
- Quality Score: Ads with better quality scores garner better placements and lower click prices
- Ad targeting: Targeting smaller geographic regions can raise the click price because the audience size is smaller
The same goes for traditional advertising. While it’s generally more expensive than digital marketing, certain factors can boost the costs. For instance, distribution and logistic expenses for physical promotions or design and production for TV advertising.
What does this all mean for your marketing budget? There’s no one-size-fits-all answer. The percentage of revenue you allocate should be flexible to your target geographic markets’ unique costs and opportunities.
Earlier, we discussed how hard it can be for startups to allocate enough funds for a strong marketing strategy.
But it’s a catch-22. Startups and small businesses have tighter budgets. Yet, as newcomers, this is when investing heavily in marketing is most crucial.
Yadegar says younger companies should invest more and drop that percentage as a company matures. That baseline, according to HubSpot, is around 11% for startups.
But funneling such a large chunk of your revenue into marketing, especially when you’re just starting, feels scary. We get it. But the payoff is well worth it.
And if you’re worried about not having the capital to back it all up, take a page out of Neighborhood Schools’ playbook.
This childcare startup turned to crowdfunding to scale and scored $3.5 million as a result. Better yet? The move itself became a marketing tactic, garnering them attention from high-profile publications.
For more established brands, the general consensus is that companies between 1-5 years old should devote at least 12-20% of revenue to marketing. Given that they’ve secured some market share, older companies should invest around 6-12%.
Now, let’s look at the competition.
There’s a reason we weave competitive research into almost every strategy for our clients: we want to make data-driven decisions.
Sure, it helps to know how much your rivals spend on marketing. That way, you know how much you should invest to compete. But it’s not just about keeping up with the Joneses. You have to look at the bigger picture, too.
Is your brand operating in a saturated market, or are competitors few and far between?
The more competition you have, the heftier your marketing budget will need to be. This will help you stand out and get a piece of the pie (ahem, market share). When competition is scarce, however, you have less need for aggressive advertising and promotion.
Take B2C companies. Yadegar says they usually spend more on marketing than B2B companies. The reason? In addition to faster product cycles (more on this in a bit) and a broader audience, they also have higher competition.
The economy plays a role in shaping your marketing budget, as well.
Just peep the latest Fall 2023 CMO Survey that shows marketing budgets have shrunk to 10.6% (nearing pre-pandemic levels). The growth in marketing spending has also slowed, with just a 2.6% increase in the past year.
Sure, there’s an anticipated rebound of 7.2% on the horizon, but one thing’s certain: the economy is forcing brands to be more cautious and strategic with their marketing investments.
Of course, these numbers don’t come as a surprise. When the economy’s on fire, marketing budgets are usually first to feel the burn. However, some marketing experts suggest this could be a mistake. Instead, investing more company revenue into marketing during economic downturns is the smarter move.
And it’s not just because it benefits them. Besides the obvious (driving sales), it’s in your best interest, too. Here’s why:
- Radical changes to your marketing plan can be a sign of instability. Maintaining your marketing activities shows that your brand can hold it down even during periods of economic hardships.
- As your competitors dilute their marketing, you get an opportunity to shine. When you maintain (or increase) your marketing budget percentage of revenue, you leverage the space your rivals have left unclaimed. Hello, more market share.
- Recessions don’t last forever; steady marketing activities give you increased momentum as competitors struggle to revive their dormant marketing plans.
Your brand offerings also make a difference.
Just as businesses have different stages, so too do products and services. These lifecycle stages influence the percentage of revenue your business allocates to its marketing efforts.
Here’s what these lifecycle stages typically look like:
- Introduction: Initial days of your product’s lifespan; you’ll invest heavily in marketing to build awareness and stir interest.
- Growth: Demand grows; marketing spending remains high to differentiate products and gain market share.
- Maturity: Most profitable stage, when sales “max out;” Marketing spending stabilizes or drops to maintain market position and fend off competitors.
- Decline: The phase-out period; Sales start to drop, and marketing dollars are cut or redirected to newer offerings. If the product is revamped or upgraded, it reenters the market and starts the cycle all over again.
As shown, your marketing needs shift depending on where your product falls in the cycle. And in turn, so does your marketing budget percentage of revenue.
Let’s imagine a new B2B product. When it first breaks into the market, this B2B company might focus heavily on content marketing or industry events to foster awareness and trust.
During the growth phase, they might redirect their efforts to LinkedIn campaigns and case studies that distinguish their product and increase market share.
Then, in maturity, they might focus on client retention strategies and creeping into new markets. Once in decline? They’ll pivot to promoting next-gen solutions.
But it’s important to note that not every product and service will follow these lifecycles. Some might stay in the maturity stage for decades. Other brands (like those in pharmaceuticals) also have to navigate stringent restrictions.
Our advice? Stay on top of industry developments, evaluate your product lifecycles often, and always be ready to pivot.
Marketing channels used
When determining how much revenue to allocate to marketing, account for the marketing channels you want to use.
There are four main categories to consider:
- Digital advertising: This encompasses all your online marketing efforts. It includes content marketing, social media marketing, email marketing, PPC campaigns, and search engine optimization (SEO).
- Inbound marketing: Draws customers through landing page optimization, video marketing, and B2B marketing. It can also overlap with digital marketing, mainly SEO and content marketing.
- Outbound marketing: This involves taking initiative to start the conversation with your target audience (rather than pull them in with interest, like inbound tactics). Examples include email marketing, radio and TV ads, affiliate marketing, direct mail, or cold calling.
- Brand awareness and brand advertising campaigns: These introduce your brand and its value to your target market. The goal is to craft customer recognition of your brand. This can include exclusive branding (fonts/designs), interesting logos, a mascot, or a catchy jingle (like the iconic Folgers song).
Some of these options demand a higher investment than others. For example, PPC campaigns will likely cost more than organic social media, depending on the scope of your campaigns across both mediums. You’ll have to be mindful of this when choosing which marketing channel to invest in.
Here’s what we mean:
Let’s say you love the idea of a fun, memorable tune for your online education program. (Education Connection, anyone?) You’ll have to budget for production costs, composers, musicians, studio time, editing, and marketing your jingle.
Contrast that with, say, designing custom fonts and graphics, and you’re looking at a significant difference in your potential investment.
If you want to determine what percentage of revenue should be used on marketing, you need a 360-degree analysis of your business. Your industry, objectives, competitors, and marketing channels all play a part in knowing precisely how much revenue your marketing efforts need to work.
HawkSEM’s approach? Anything that prioritizes quick, quality conversions:
“We like to start with tried-and-true methods that are the path of least resistance to revenue by focusing on bottom-funnel performers and using our agency data to have confidence in budget allocation decisions,” says Yadegar.
He describes this as the ideal sweet spot where:
“If we spend more we’ll have diminishing returns, so balancing all that is key to driving sustainable results.”
Let’s be honest, talking about budgets isn’t all that glamorous, but you know what is? Watching your brand flourish and reap killer ROI. That’s the power savvy marketing investments hold over a scattered strategy.