Even seasoned marketers routinely wonder how their budget stacks up against traditional averages and what they should be spending. Our answer is always the same: “It Depends!”

The first step in determining an appropriate budget is a change in mindset. Consistent, long-term marketing is NOT an expense.  Rather, it is an essential investment that pays dividends in the form of sales, income and market share. Marketing is a business asset that drives revenue.

A fast, easy way to set your spend is to fund marketing as a percentage of gross revenue. Start-ups and growth-oriented companies, especially those in highly competitive or emerging fields, must spend a higher percentage of their revenue to build awareness, educate prospects and drive sales. Established brands with known products and an existing customer base may get away with lower, maintenance-level spending.

Business analyst firm  IDC reports that early-stage companies routinely spend 75-150 percent of their annual revenue on marketing during the first 2-3 years in business. Established brands spend 10-20 percent, while mature ‘cash cows’ can be milked spending just 5 percent.
Inc. Magazine reports that almost half of the Inc. 500 spend between 10 and 20 percent of their gross revenue on marketing. And online resource  Marketing Profs states that growth-oriented companies invest between 9 and 18 percent annually.

A more sophisticated approach is to determine the marketing cost of each sale multiplied by the desired number of sales for the year.  For example, if a widget costs $12 to market and your goal is to move 1 million widgets this year, your marketing budget should be approximately $12 x 1,000,000, or $12 million. This approach requires insightful projections or an accurate analysis of historical data to determine the cost of moving a widget. Shortchange the required investment and sales will fall – exponentially.

These are just two of the more common strategies used to set a marketing spend. Numerous variables affect this simplified perspective, and you must identify and account for them all. It is also critical to remember the important lesson the dot-com bust taught overly optimistic investors: A company can outspend its available resources for a very limited time before economic reality sets in. Following these proven guidelines will help your marketing spend become an indispensable investment that generates demand and builds the bottom line.