LATEST NEWS / 09 - 01 - 2024
What Percentage of Revenue Should you Spend on Marketing?
In the world of business, success often hinges on smart and few investments, which are as critical as your marketing budget. Allocating the right percentage of your revenue to marketing is a strategic decision that can shape your company's growth, brand recognition and bottom line. Read this article to delve into the art and science of determining what percentage of your revenue should be spent on marketing. Let’s explore the various factors that influence this decision and provide basic insights to help you strike the right balance between investing in your business's future and maintaining financial stability.
What is Revenue and How is it Calculated?
Revenue refers to the total income, not excluding any costs or expenditures, generated by a business or an organization from its primary operations, typically through selling goods, products, or services to customers. It represents the money that flows into the company due to its core business activities, over a specific period.
The most simple formula for calculating revenue is: Revenue= Quantity Sold × Average Price per Unit!
Revenue is a fundamental financial metric and a key indicator of a company's financial health. It is often reported on a company's income statement, also known as a profit and loss statement and is sometimes referred to as sales, turnover, or sales revenue. It is used by finance professionals to determine a business's profitability and its overall financial moves and whether the latter needs to change moving forward. Various methods of accounting can be used to determine revenue and the approach chosen will affect how it is calculated. Accrual Accounting for instance, is a way of recording sales made on credit as revenue when goods or services are provided to the customer and it recognizes revenue in accordance with specific guidelines, regardless of whether payment has been received at that time.
The Importance of a Marketing Budget
A marketing budget is a financial blueprint that details how money is designated for different marketing endeavors, campaigns and activities during a defined timeframe. It functions as a guide for your marketing efforts and ensures that resources are distributed effectively to meet your business objectives. The portion of your revenue allocated to marketing is a critical element within this budget.
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Factors Influencing the Percentage
Determining the appropriate percentage of revenue to allocate to marketing involves considering several factors:
- Industry and Competition: The level of marketing investment needed can vary by industry. Competitive industries often require larger marketing budgets to stand out effectively.
- Business Stage: Your business's lifecycle stage can affect your marketing budget. New businesses may allocate a higher percentage of revenue to gain initial market traction, while established brands may spend less but focus on maintaining their market presence.
- Growth Objectives: Your growth goals are a key determinant. If you're aiming for rapid expansion, you may allocate a higher percentage of revenue to marketing to support that growth.
- Target Market: The size and characteristics of your target audience can impact your marketing budget. A broader target market may necessitate more substantial marketing spending.
- Marketing Strategies: The specific marketing strategies you employ also matter. Online marketing, content marketing and social media advertising for example, can have different cost structures.
What is the Average Revenue Spend ?
Various studies have given insights and advice on the amount of revenue that is suggested to spend on marketing practices, with the latest CMO Survey conducted by the American Marketing Association and Deloitte, being one of the most significant. As concluded, the portion of the marketing budget relative to company revenues decreased from 10.9% in the spring of 2023 to 9.2%. The percentage change in marketing expenditure over the past year was 2.6%, signifying a substantial decline compared to the 10.4% growth in marketing spending reported one year ago, indicating a 75% drop in growth rate. It is anticipated however, that this growth rate will rebound to 7.2% in the coming year.
Additionally, according to the U.S. Small Business Administration, small businesses typically aim to allocate approximately 7-8% of their revenue to marketing, assuming they maintain profit margins of 10-12%, while start-ups and micro companies often spend as little as 2-3%.
However, this allocation can vary depending on whether the business operates in a B2B or B2C industry. Deloitte's research reveals that in the B2B product and B2C service sectors, businesses tend to allocate around 10% of their budget to marketing. On the other hand, in the B2C product and B2B service industries, marketing budgets can be higher, ranging from 15-18%.
On average, companies typically allocate approximately 10% of their revenue toward marketing expenses. However, it's important to note that marketing budgets can vary widely, ranging from as low as 5% to as high as 15% of a company's total revenue.
Determining the appropriate percentage of revenue allocation to marketing is a strategic decision that depends on various factors, including your industry, growth goals and marketing strategies. While industry benchmarks and expert recommendations provide useful starting points, the key is to align your marketing budget with your business objectives and continually assess its effectiveness. Flexibility, adaptability and a data-driven approach are crucial to optimizing your marketing spend and achieving sustainable growth in an increasingly competitive market.
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