Marketing budgets have a wide business-to-business range, falling between 1 and 25 percent of sales revenue. However, according to a study conducted by the CMO Council, a professional organization for marketing managers, a large number of company marketing budgets are below 15 percent of sales revenue. While spending percentages vary widely, the SBA recommends that small businesses allocate 7 to 8 percent of their gross revenue to marketing and advertising. Marketing is responsible for leading revenue growth in 38.4% of companies.
And while the figure of 10% may be adequate for some companies, it is not a one-size-fits-all figure. As a sales leader and entrepreneur, those are the last words I want to hear. And yet, over the past year, I have had several conversations with the founders that included almost verbatim this statement. And if you're starting a technology business, then you know that without investment in engineering and development there's no product to sell. But this is not a chicken or egg dilemma.
It's part of the ongoing business challenge of where to spend limited funds. And as you write (or rewrite) your business plan, there are best practices to rely on and not get caught in a dilemma. Some marketers say that, in reality, startups and small businesses usually allocate only 2 to 3 percent of revenue for marketing and advertising. Still, other marketers suggest a wide range between 1 and 10 percent and more, depending on how long you've been in business and how competitive your market is. Clearly, these numbers are everywhere.
And while some may be selfish, 7 or 8 percent of SBA gross revenue seems to be a good benchmark. Now, what happens if it's pre-revenue? Apply the above percentage to the projected revenue in your business plan. As an entrepreneur, your main job is to sell. Your small business may be demanding on your time and money, but you need to make sure you spend enough time and resources on sales, or your other business activities won't make sense. Selling expenses include salaries, bonuses, overheads and administrative costs.
Each business is unique when it comes to sales as a percentage of revenue. A manufacturing company, for example, must spend money to manufacture products, while an electronic business that sells information can focus on selling without worrying about physical manufacturing and storage of the product. The average is much higher for (successful) SaaS companies, where many spend more than half of their annual recurring revenue (ARR) on sales and marketing costs. According to Tomasz Tunguz, partner at Redpoint Ventures, during their first three years, SaaS companies typically spend between 80 and 120 percent of their revenue on sales and marketing. It then stabilizes around 50 percent starting in the fifth year. The consistent element is the importance of the cost of sales as a percentage of projected revenue or revenue.
The goal of spending on sales and marketing is not for the sake of spending; it serves a purpose; serves to achieve the objectives set out in the business plan. Customer Acquisition Costs (CAC) are all actual or projected expenses incurred when acquiring new customers. Costs such as salaries for your sales and marketing team, digital and other advertising expenses, and any other expenses related to onboarding new customers. To understand the total cost you incur to acquire a customer, calculate the unit cost by dividing the total spend by the number of new customers. Customer lifetime value can be calculated with varying levels of sophistication and accuracy; and if done in the context of a start-up using projected cost and revenue figures, robust documentation of all assumptions is required.
The simple version of the formula is CLV %3D Annual gross profit per customer multiplied by the average number of years. Whichever approach you take, create a business plan that includes sales and marketing investments. There is no dilemma in a successful business. Abby Pearson — How much should the marketing costs be for my startup? Jason Andrews — How much should my company spend on sales and marketing? The advertising/sales ratio, also known as A to S, is a measure of the effectiveness of a company's advertising campaign. Therefore, it's best to create your advertising budget starting with a plan, and then validate your spending with benchmarks between advertising and sales. The volume of sales a company makes can have a significant impact on the percentage of sales revenue it will use for marketing. In recent years, marketers have turned to mobile devices to generate leads, increase sales and improve customer engagement through advertisements on mobile websites and advertisements in downloaded apps and games. It follows from these divergent opinions that the percentage of gross revenue for marketing and advertising depends mainly on who you ask. The recommended marketing budget, as a percentage of sales, varies by industry, although most companies stay below 15 percent of sales.
The annual Schonfeld & Associates Advertising Ratios and Budgets survey reports on the advertising/sales relationships of more than 5,000 individual companies in more than 300 industries. At the same time, which can make it difficult to determine which campaigns, if any, were responsible for the new sales. In addition, Salesforce has a 19.6% market share in the CRM industry which is larger than that of some of the most well-known CRM providers: Microsoft SAP Oracle. As a general principle players with high margins tend to spend more on advertising than players with low margins regardless of the industry and what the industry's average advertising-to-sales ratio is. Close tracking of promotions can show which media works best; and the relationship between advertising and sales can show the effectiveness of advertising spend. B2B organizations can often maximize smaller advertising budgets because they rely on their sales force to generate leads so their total spend may be closer to 2%. The percentage of gross income is one of the most favored budgeting methods because it allows your expenses to fluctuate as your income fluctuates. You may be able...