Of the many budgets within a company, the marketing budget is often the easiest to scrutinize. All the “what ifs” tend to creep up in the mind: Are we doing it right? Was that the right decision for the money? Should more money go here and less go there? What are our competitors doing? How much are they spending? While it’s certainly appropriate for any CMO to be evaluating how they are spending the company’s allotted marketing dollars—successful marketing requires it—oftentimes those questions are being asked because the most important question really hasn’t been answered:
How much money should be in the marketing budget?
That’s really the question every CFO and CMO should be asking, and it’s a question that depends on a variety of factors, including the size of the company, the industry it serves, and the overall company revenue and gross profits. But when looking at the marketing budget question with that info in hand, it’s easier to answer than many think.
Take an example: If company ABC, which is a B2B service company that grosses $50 million in revenue each year, spends $1.5 million on marketing each year, that may sound like a great amount. To some it may even sound like too much. But when you break it down to what companies of similar size and scope typically spend, it’s not enough to keep up.
According to data and trends as noted in the Gartner 2020 CMO Spend Survey, the expected annual budget of a CMO is on average 11 percent of revenue. That average has been maintained from 2014 until 2020. Under this scenario, company ABC is only contributing 26 percent of the average spend to its marketing efforts, when in fact it should be investing at least $5.5 million per year. Consider the lost potential, year after year, when under-budgeting marketing by 74 percent of the industry average.
The alarming difference in spending can go even higher. Other surveys actually suggest that B2B marketing budgets as a percentage of total company budget are upwards of 12.6 percent on average.
Don’t Pat Yourself on the Back Too Quickly…
While the marketing budget is based on a few factors, what is noticeably not included in that above list have sales lumped in with the marketing budget. If you say your company’s marketing budget hits the right amount based on the above but it includes sales, you need to rethink that decision.
On the surface, it may make sense to combine sales and marketing into one budget. Admittedly, they do have similar goals in in mind as to what they are trying to achieve. However, combining them often leads to overspending on the sales side in order to reach a result that marketing could more easily—and typically more affordably—achieve. Let’s look at another example: Even a company that boasts an aggressive and large sales force that works five days per week, 52 weeks per year, there are only so many people they will be able to reach per day. Via sales, turning a lead into an actual customer takes multiple points of contact. A smaller amount of money put into marketing can reach the same amount of potential customers in one day that the sales force may reach in one year.
The Covid Effect
In full disclosure, the pandemic over the last 18-plus months has drastically affected marketing budgets across the board. Just like it has altered every other decision and budget within a company, the volatility brought about by Covid-19 has caused companies across the board to slash marketing budgets as well. In fact, the average percentage spent on marketing has fallen to the lowest level in the history of the Gartner survey. As Gartner found, some companies reduced marketing budgets by at least 15 percent or more, with the current average marketing budget now coming in at 6.4 percent. But important to note is that even with this dramatically reduced average marketing spend post-Covid, company ABC should still be spending more (approximately $3.2 million more).
You’re in for a (Spending) Shock
The reduction in marketing budgets through the pandemic may be tempting for many CFOs to try to keep in place moving forward. If we’re all being honest, the marketing budget is typically one of the last budgets to recover. But the reality is that marketing matters. In fact, CMOs are starting to see—or expect to soon see—their budgets being reinstated at full, or next to full, potential. The most recent CMO Survey reveals that many B2B companies generating $50 million in revenue—though they had reduced marketing budgets 5.1 percent over the past 12 months—expect to see them increased to 10.3 percent of total revenue over the next 12 months. The increased percentage is even higher (16.9 percent) for expected increases in marketing budgets in general for B2B services. That means the allotted marketing budget for our example company, company ABC, of $1.5 million will never suffice.
Don’t Just Take Our Word for it
We know what you might be saying: a CMO is going to over exaggerate the budget needed for marketing. Or perhaps you’re thinking about how your company doesn’t have a CMO, so these numbers are completely inflated. Well think again. The increase in marketing budgets upwards of 10.3 to even 16.9 percent isn’t from Gartner or even another marketing firm. It’s guidance straight from Deloitte. If that’s still not convincing, consider this: even The Wall Street Journal reports that a marketing budget should hit at least eight percent. Though well lower than Gartner or Deloitte, it still illustrates that at a bare minimum our example company should be investing $4 million into its marketing budget.
So Why is Your Marketing Constantly Underperforming?
The answer is simple: because you’re just not spending as much as your peers. To increase visibility, drive revenue, and meet company goals, it takes a strategic marketing plan and the right budget. So that brings us back to our question: How much money should you be spending on marketing? For our example company, it means at least meeting the average industry spend for companies of the same size and scope. When the right amount of money is budgeted, a strategic marketing strategy is in place, and metrics are tracking the strategy’s performance to see what the dollars are actually doing, the bigger (and correctly sized) marketing budget clearly makes sense and won’t have to be second guessed. Don’t stunt the potential of the strategy or the company’s growth by not investing the right amount of money into marketing. When it comes to investing more in marketing, the time is now.
Ready to take the right steps toward investing appropriately in your marketing? A FitzMartin advisor can help you determine the correct path and get you where you need to be.