There's really only one right answer to this question: "It depends."
It depends, in particular, on the type, size and stage of business you're in, as well as what you're trying to accomplish.
The amount devoted to marketing varies by type of business significantly. For example, it generally costs more to market to a consumer market than business-to-business (B2B), simply because the number of people you must reach is so much larger. And marketing to a broad, general market is more costly than marketing to a well-defined niche.
Another important issue is whether you are trying to increase awareness about a product that is discretionary spending for its buyers or just competing with other providers over a product or service that "everybody" needs. For example, hospitals (an essential service) typically only spend about 1% of their net revenues on marketing, while pharmaceutical companies (frequently a discretionary spend) spend more like 20%.
The stage of your business is an essential factor, as well. It costs several times more to launch a new product or create awareness of a new company than to maintain an existing brand. One can well imagine that if Coca-Cola completely stopped advertising for a year, sales might slip a bit, but they would hardly go away entirely.
The most common method of setting marketing budgets is as a percentage of gross sales, and there is plenty of history and analysis supporting a budget in the neighborhood of 2-8% of gross sales for large, well-established companies.
Small businesses, however, particularly early in their existence, will likely need to spend more than this. Also, for small businesses, because cash flow is SUCH an important issue, I generally recommend basing your marketing budget on a percentage of gross profit (sales less cost of goods), rather than a percentage of sales. If you have a large line of credit, cash reserves and/or venture funding, you may be able to ride out the gap between the money you spend on marketing and the time it takes for it to return in terms of sales, but this is often not the case in smaller businesses.
I personally recommend (and have seen other small business experts support) a baseline marketing budget in the neighborhood of 20-30% of your gross profit. This includes the cost of dedicated sales & marketing staff, advertising and all other sales & marketing expenses.
Of course, depending on your business, that can change radically, especially if you have very high margins. For example, in the world of affiliate marketing of information products, it's not at all uncommon to pay 50% of the sale price to an affiliate.
Keep in mind that if marketing pays for itself quickly enough and reliably enough, the only limit on how much to spend on marketing is cash flow. If you are fortunate enough to find any kind of performance-based marketing that you don't have to pay for until the sales come in, it changes the balance dramatically. Even if you can develop a reliable, predictable advertising channel such as pay-per-click advertising, you are still only limited by your cash flow.
For a small business, it's important to focus on the high-reliability marketing channels first and foremost. Sure, getting on Oprah could make your business skyrocket, but how much is it going to cost you to chase that compared to your odds of success? Focus on the things that have a relatively low cost and a known high rate of return: networking, referrals, self-generated publicity, advertising in targeted publications such as trade journals, social media and so on. Save the big, risky advertising buys for when you have a little more cash to play with -- kind of like diversifying your investment portfolio.
Answered: Sep 20, 2009
