What Should My Marketing Budget Be? Three Models That Make Cents.

marketing budget

Many B2B telecom, IT and cloud companies ask us what they should be spending on marketing. It’s an excellent question, and one that isn't always easy to answer, especially if you’ve never had a formal marketing budget before. 

To help you come up with the right numbers, here are three different marketing budget models to consider:

Model #1: Marketing Budget as a Percentage of Revenue

This model is the easiest to calculate and the most commonly referenced among marketing leaders. You simply apply a percentage of your total revenue to marketing, typically 6-20%.

marketing budget as a percentage of revenue considerations

What should your percentage be? It depends on:

  • The current size of your company
  • How aggressive your growth goals are
  • How profitable your business is

Here are a few takes on the revenue percentage model:

smb_budget

Small Business Marketing Budgets

According to the Small Business Association, companies under $5M in annual revenue typically spend 7-8% of their top line on marketing.1

"As a general rule, small businesses with revenues less than $5 million should allocate 7-8 percent of their revenues to marketing. This budget should be split between

1) brand development costs (which includes all the channels you use to promote your brand such as your website, blogs, sales collateral, etc.), and

2) the costs of promoting your business (campaigns, advertising, events, etc.)."

b2b_budget

B2B Services Marketing Budgets

Looking at B2B specifically (which includes telecom, IT, and cloud), Deloitte published in its 2020 CMO Survey, that B2B services companies are spending 11.4% of revenue on marketing.2

On the flip side, according to Gartner's 2021 CMO Spend Survey, IT services businesses are currently spending 5.9% on marketing, down from 9.6% in 2020.3

Consider what some of these large, publicly traded companies spend on marketing, according to Vital:

  • SalesForce: 46%
  • Tableau: 51%
  • Microsoft: 15%
  • Google/Alphabet: 11.9%
  • Oracle: 22%4

You've Gotta Start Somewhere

We know that going from zero to 20% (or even 6%) can be a big jump, so first, get clear on your past and projected revenue. Then decide as a leadership team where you can start and how you can expand. 

IMPORTANT! Many companies make the mistake of investing too little at the beginning of a new marketing program. They say, "I'll invest this little bit, and when it pays off I'll invest more."

Seems logical, but many times that money is wasted. Remember, many airplanes burn more than half of their fuel on takeoff and climb. Business is no different. It takes significant effort to get off the ground, but once airborne, you can cruise for a very long time. If you invest too little up front, you won't have enough power to get any lift. 

Also consider that in a competitive industry, many companies are spending big. Make sure you invest enough to make an impact.

Model #2: Lifetime Value Ratio

Another model to consider is your lifetime value (LTV) to cost of acquisition (COA) ratio. According to Corl, you should target a 3:1 or 4:1 ratio for optimum growth.5 Spending more than that means your margins will be thin or non-existent; spending less means you’re probably not reaching your growth potential.

How to Calculate Lifetime Value (LTV)

To calculate your LTV, multiply your average monthly revenue per customer by customer lifetime in months.

For example, if your average monthly recurring contract is $2500, and your average contract length is 36 months, your lifetime value is $90,000.

$2500 X 36 = $90,000


lifetime value calculation

How to Calculate Cost of Acquisition (COA)

To calculate COA, take your total sales & marketing expenses, and divide by your new customers acquired.

cost of acquisition calculation

Your Ideal LTV:COA Ratio

Below are some industry benchmarks on what your ideal ratio would be, using the $2500 MRR example at 36 months from above.

  • 1:1 You will lose money the more you sell - $90,000
  • 3:1 Good ratio (industry benchmark) - $30,000
  • 4:1 Indicates a good business model - $22,500
  • 5:1 Likely under-investing in marketing - $18,000

In this example, your ideal COA would be between $22,500-30,000 (total sales and marketing expenses). 

This model works best for companies who are past the startup phase, have access to these data points, and have an in-house sales team. 

For an even more detailed version of this LTC:COA model (including churn), check out this post by geckoboard.

marketing_headcount (1)

Marketing Headcount

The final way you can think about budget is in terms of marketing headcount.

Before we get into these numbers, let's think for a moment about all the skill sets necessary to run a holistic, marketing program. According to CoSchedule, there are 50 essential skills to be successful in marketing.6 Fifty!!! Here are some of our favorites:

Marketing Skill Sets

  • Marketing strategy & budgeting
  • Brand strategy, messaging, positioning
  • Storytelling & persuasion
  • Copywriting & proofreading
  • Design
  • Web and email development
  • Digital strategy
  • MarTech strategy and management
  • Ads management
  • Reporting and analytics

This is by no means a comprehensive list, but should convey that no single person can possibly have all these skill sets (and if they did, no one could afford them!).

So if you hire an internal marketing person (which most companies should), he or she will still need a marketing budget to outsource some of the essential activities you'll need to be successful.

For these calculations, you'll need to do some research on marketing salaries in your  local area. 

Marketing Titles & Median Salaries

Here's what some median marketing salaries look like for Chicago, IL according to Salary.com:

  • Marketing Director: $157,221
  • Digital Marketing Manager: $115,193
  • Graphic Designer: $60,000
  • Web Developer: $121,390
  • Brand Strategist: $63,771
  • Copywriter: $70,928

To hire this whole team in-house would cost you around $600,000 per year just in salaries – and closer to $900,000 with taxes and benefits factored in.

marketing team costs

Another approach is to hire a smaller in-house team (1-2) people, and outsource the rest either to contractors or an agency that can fill in the gaps of your current team's skill sets.

Typically for the price of 1-2 marketing headcount, you can access an entire team of expert marketers, without the costs associated with employees. 

A Budget That Works FOR You

Creating a marketing budget is no easy task, so we hope these models are helpful and get you pointed in the right direction. 

Of course, more important than the number itself is that the budget you invest drives the results you desire. If you'd like to chat with us further about your marketing goals or need help calculating your ideal budget, feel free to schedule a time with us here.

Sources:

  1. https://www.sba.gov/taxonomy/term/15051?page=37
  2. https://www2.deloitte.com/us/en/pages/chief-marketing-officer/articles/cmo-survey.html
  3. https://www.gartner.com/en/marketing/research/annual-cmo-spend-survey-research
  4. https://vtldesign.com/digital-marketing/content-marketing-strategy/percent-of-revenue-spent-on-marketing-sales/
  5. https://medium.com/corl/how-to-calculate-lifetime-value-customer-acquisition-cost-ratio-for-your-saas-business-332510188726
  6. https://coschedule.com/blog/marketing-skills

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