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How Big Should My Marketing Budget Be?

Synchronicity.

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

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15 Comments
  1. Finally. I’ve been looking for an answer to this for years. Makes a lot of sense.

  2. Thank you for this. Your web-site is very cool. I’m impressed by the details that you have on this blog.

  3. I am here for the first time here and you helped me. We go through this every year now I have a starting point.

  4. I get so frustrated with budgeting. Thanks for giving me a starting range. The worst part is our CFO penalizes us for saving money. If I save money in one quarter, he reduces expenditures for the quarter to look good to our board and I don’t get to spend that savings for the rest of the year. So he’s actually making me spend more each quarter.

    • I get it Tina. That is very common. Try working with your CFO on future spend. It’s nearly impossible to execute a marketing budget exactly as planned through the entire year. In fact, if you did, you’d be doing a terrible job as a marketing employee because marketing people should be testing, analyzing and adjusting their spend according to results not a budget plan.

      One suggestion is that you can include a prepayment for a program you want to do in the next quarter or alternatively recognize an expense in a different quarter based on when you actually completed to program. If you work with you finance team closely, they can probably find a way to solve the issue. I’m sure they don’t like the unintended consequences either.

  5. Thank you for this.

  6. Found you on Bing and so glad. Info on marketing budets is so hard to find. Please post more on marketing rules of thumb, would love to see it.

    • Thanks Ben. I’ve had a lot of good response from this article and I’m looking at doing more on KPIs and stats for marketing.

  7. I want to say that this post is amazing, just what I was searching for.

  8. I love reading your website and also assists me personally in my job.

  9. An intriguing discussion. You really should write far more on this topic, it may well be a taboo subject but more marketing folks should share their budgets, metrics, and more.

  10. Great breakdown Matt. I think many business owners understand they need to commit to marketing spend, but get so overwhelmed they don’t know where to begin. Sometimes they are too focused on ROI for their own good and don’t spend anything.

    • Thanks. ROI is important, especially in determining what programs are worth carrying forward. But let’s compare it to the budget for sales reps. If a sales rep doesn’t make quota, typically you wouldn’t eliminate that territory. You might fire the rep, but you’d replace the rep at the same time. So that rep or territory gave you bad ROI but you’d keep trying something new until you got it right. I think ROI is important, but marketing deserves the same at bats as sales.

      BTW, I read that the average top marketing exec has a 15-month tenure, the shortest of all top execs.

  11. I’m really impressed with your writing and the format of your site. It’s a fun read and I learn something about marketing every week.

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