For some reason, I’ve had five conversations in the last few weeks with clients about marketing as a percentage of X, where X might be revenue, EBITDA, new sales, or another measure.
So if you’re wondering about this, I thought I’d share my rules of thumb.
If you are a low-to-moderate growth company, you should budget 5-10% of gross margin. For a typical software company, gross margin is at 90% or higher, effectively making the rule of thumb for marketing expenditures 5-10% of revenue. If you are a food manufacturer, your gross margin is perhaps 40%, so you should budget 2-4% of revenue for marketing. If you spend less than 5% gross margin you cannot hope to keep up with your competition and will always face pipeline shortages, frustration and awareness issues.
Hyper-growth companies face a much different challenge. In fact, many companies in a hyper-growth phase are pre-revenue, let alone profitability. In that case, percentages are meaningless. Even established companies will often spend as much as 20% of revenue for growth-phase product launches. In their first year of revenue, Salesforce spent 500% of their revenue on sales and marketing expenditures knowing that it was more important to their long-term valuation to build a strong base of recurring revenue than it was to build a small amount of EBITDA in that stage of their lifecycle.
So there you have it. Or do you?
Unfortunately, the problem behind these kinds of questions is in believing that marketing is an expense and not an investment. Marketing is only meaningful if it helps you achieve your goals. Now, usually those goals are revenue related. But in the case of many cloud-based or SaaS companies, the goals may be related to brand, reach, freemium registrations and other non-revenue goals.
If you don’t know what goal you want to achieve with marketing–you’re just throwing some spaghetti against the wall and hoping some of it sticks–then you should budget 0%. Without a well-thought marketing plan, you might do more damage than good.
Photo: Darius A Monsef IV