The 3 rules that industry insiders use to guide business-to-business marketing budgets
Have you ever wondered how a marketing company establishes a budget for a new client? I bet you have, because it’s a question that potential clients ask us all the time. In this article, I’m going to share the secrets of setting marketing budgets with you.
First, a little context. If you’ve tried to figure out benchmarks for marketing through the usual sources (marketing associations, industry groups and government statistics bureaus), you’ve come up empty handed. I know because I’ve tried that too. Google searches leave you with anecdotal data, and guidelines that aren’t applicable because they aren’t for business-to-business (B2B) marketing, or they’re for incredibly large companies.
When it comes to marketing budgets for small and mid-sized B2B companies, there’s relatively little guidance. Part of the issue is that there aren’t any ‘firm’ rules. Every company needs a marketing plan (and budget) that is based on its specific situation. Be wary of marketers who offer you a canned set of tactics and pricing – those activities are more likely to be what they can efficiently produce, rather than what your business needs.
Even though there aren’t firm rules, there are guidelines that you can use to direct your marketing efforts. Most marketers learn these guidelines over time, and after a while they don’t refer to them anymore, because they inherently know what’s needed and what the relevant budget will be.
But if you’re new to marketing, these guidelines will help make sure you don’t end up completely out of the ballpark.
Rule #1: ROI
The best place to start when thinking about your B2B marketing budget is Return on Investment. If you can do a calculation of your profit margin, the amount of extra business that marketing brings in, and the cost of your marketing, you should. A simple ROI calculation on a marketing campaign looks like this:
- Cost of the marketing campaign: $10,000
- Gross sales generated from the campaign: $40,000
- Your gross margin: 40%
- Profit created by the campaign: $16,000 ($40,000 * 40%)
The ROI calculation is:
(Return – Investment)
($16,000 - $10,000)
Your return is 60%.
What a phenomenal return!
Business owners would have no problem investing in marketing if they could see these kinds of returns on their marketing activities.
The problem is, it’s never this simple to see the return on marketing.
In Business-to-Business, relationships need to be established and nurtured. Which means that multiple tactics are needed over long periods of time in order to secure new deals. And often new customers do business with their suppliers for years (high lifetime value), and it’s difficult to pinpoint which marketing activities lead to what business. There is an entire industry evolving around ‘attribution’ – the activity of assigning revenues to marketing activities.
Most of the chief marketing officers I know say that it takes them 2 to 3 years to establish a clear ROI on their marketing function. And these are good CMOs.
So Rule #1 isn’t always a realistic place to start, as much as we’d all like it to be. Which brings us to the next rule.
Rule #2: Product Launch and Go-to-Market
If you are a new business, or bringing a new product to market, you will need to do a certain amount of marketing to establish the product or company and make it visible and credible to the market. Things like corporate or brand identities, websites and collateral. There’s no way to do an ROI calculation on these things, and they are the price of entry for getting a B2B product or company off the ground and on the road to success. Companies who scrimp here often pay the price in failed product launches or businesses – the great product that no one knows about or the company that look a little questionable so no one bothers to call them.
The rule of thumb for product launches and go-to-market is the rule of 5. Identify the Year 5 revenue goal, and multiple it by 5%. That is the budget estimate for your launch and year one marketing.
- Year 5 revenue target: $2,000,000
- 5% of the revenue target = $100,000
By this rule of thumb, your marketing budget for the product launch and first year of marketing activities will be around $100,000.
If you are launching a new B2B company, multiple the budget above by .5. Your budget should be roughly $50,000. I’ve known many strong B2B companies who get off the ground successfully with a limited marketing budget, and then invest more seriously in marketing once their revenues are more established. See rule #3.
Rule #3: Marketing for established B2B companies
If your B2B company is a going concern, but hasn’t necessarily spent much in marketing in the past, there are a number of guidelines to help you create a reasonable budget.
The rule of thumb for B2B companies is a marketing budget of 2 – 5% of gross target revenues. If your business is targeting $15M in revenue, a total marketing spend of $300,000 - $750,000 is the benchmark. This includes staff, programs, advertising, tradeshows, etc – everything in your marketing function.
That is a wide range, of course. Here’s how to home in on the relevant budget for your company:
YOUR CURRENT MARKETING SITUATION
If you’ve been running a marketing function for a number of years, you’ve already established a good website, your keywords, have great collateral, and have the technological systems (CRM and marketing automation) running smoothly. This means your annual marketing budget will be less rather than more.
If you haven’t had a dedicated marketing function and are at the starting block, you’ll need to make some investments in year one and two to get your marketing and technology in place. This will bring a higher budget for the years in which you’re building the function.
Some B2B industries spend relatively more on marketing (eg software) and some spend relatively little (distributors). If your industry is mature and commoditized, it likely spends at the lower end of the 2 – 5% range. If you’re in a fast moving and evolving industry, it will be at the high end of that range, or above it. The software industry, for example, is known to spend 15% per year on marketing.
If your industry is high margin, expect to spend a higher percentage on marketing. If it’s a tight margin industry, the spend will be much less on marketing.
YOUR COMPANY SIZE
The 2 – 5% rule applies to small and mid-sized B2B companies, usually from $500,000 in revenue to $100M. As you can guess, the equation brings different results depending on the size of the company. If your business is targeting $1M in revenue, you’re going to be at the high end of the range (probably above it - $50,000 budget or more). And businesses closer to the $100M mark will, in many cases, spend less than $2M.
If you’re setting your annual marketing budget, use these ‘industry insider’ guidelines to establish a realistic budget that will allow you to accomplish your goals. It doesn’t necessarily mean that spending less or more isn’t the right level for your company – the ultimate measurement is to compare to last year, and determine if the business is improving or not. If your business performance was better and your marketing is a component of that success, start building the systems to determine the ROI on your marketing – that will give you best budget guidance possible.