A quick and straightforward primer on how B2B companies can figure out how much to spend on marketing.
One of the questions owners of B2B companies ask all the time is "How much should I spend on marketing?" Chances are, if you own a company like this—one that sells to other companies rather than consumers—you too aren't sure how to answer this question. There isn't a "one size fits all" answer to this question, such as every B2B company should spend X% of its revenue on marketing. Still, based on my work in the trenches over the past 10 years with B2B companies big and small, I can share some rules of thumb.
The first step is to consider these five key variables:
Companies in sectors such as software or design traditionally spend big on marketing, while those in commoditized industries or ones with thin margins lay out next to nothing. It's important to know the benchmark marketing spend in your sector in order to help determine your own spend. One way to do this is to look to your industry association. These organizations often do studies across their membership base to determine how much members spend on a variety of business functions, including marketing.
YOUR COMPANY'S SIZE
Large businesses, ones with revenue topping $100 million, usually spend a smaller percentage of their target revenue on marketing. A small company needs to spend a higher percentage in order to build its brand and generate sales leads. For example, a company with revenue of $150 million might generate a tremendous ROI from spending just 1% of its target revenue on marketing, so a marketing budget of $1.5 million would suffice. But a company with revenue of $2 million needs to spend more than 1%, because $20,000 won't be sufficient to build brand awareness and gain market traction. A company of this size may need to think of spending more than 2.5% ($50,000-plus) in order to get meaningful results.
THE POSITION YOU DESIRE IN YOUR SECTOR
Companies that want to establish themselves as leaders or premium providers in their sector will likely need to set aside a larger marketing budget than ones that are just looking to be price competitors.
YOUR TARGET MARKET
Some buyers and influencers are harder to reach than others. For example, a company selling to the CEO of a hospital will likely need a larger budget than one that is targeting purchasing agents for small and mid-sized health-care clinics. In order to set an accurate budget, you need a sense of how challenging, and therefore costly, it will be to get a message through to a particular target market.
THE SCOPE OF YOUR OPERATIONS
Companies that are pursuing a global market should spend more than those focusing on a small geographic area. For example, if you're selling in North America, Europe, the Middle East and Asia, your marketing budget will need to be larger than if you're selling exclusively in Calgary and Edmonton.
Once you've considered the above five variables, here are two rules of thumbs I've developed based on my experience with B2B marketing budgets:
- Product launches: For the pre-launch, launch and Year 1 of a new product, spend 5% of your Year 5 target revenues. So, if your target is $5 million in sales in Year 5, you should spend $250,000 for the launch and Year 1. Again, consider the five variables above when setting your budget. As an example, a company that's launching a new product in a mature sector might start with the 5% rule of thumb, then opt for a budget of 3.5% because companies in its sector don't spend heavily on marketing. On the other hand, a young mobile app development firm might need to spend significantly more than 5% in order to gain market traction quickly, knowing that it operates in a sector full of aggressive marketers.
- Going concerns: In general, B2B companies that are beyond the startup phase should consider 2% to 5% of their gross target revenue as a marketing budget. For example, if your target revenue for this year is $10 million, spending $200,000 to $500,000 on marketing is reasonable. Most B2B companies start in this 2% to 5% range, then consider the five factors above to shift up and down as appropriate. A technical services company that sells to risk managers in the global nuclear industry might budget more than 5%, given the scope and challenge of its tough-to-reach target market. But a trucking company with $300 million in revenue that has just celebrated its 50th anniversary might be fine with a marketing budget of less than 1%.
As you can see, these are wide ranges, and the "just right" marketing budget varies considerably based on the five variables listed above. Keep in mind that there are often reasons to go above or below the 2% to 5% range that I use as a general rule of thumb. There are B2B industries that commonly spend above 5%, and many that spend less than 2%.
To illustrate this, here are two very different companies I'm working with now and their marketing budgets:
- Company A is in a traditional industry that historically hasn't done a lot of marketing. It has well over $100 million in sales, and its marketing budget is just 0.15% of its revenue target. That budget is more than $500,000, and it provides a lot of opportunity to raise awareness and generate leads. Despite the percentage being very low, I'm excited at what this company is going to be able to accomplish in marketing this year.
- At the other end of the spectrum is Company B, a business-services company with a $3 million revenue goal for this year and a global market. It will spend closer to 8% of its targeted revenue on marketing, and we're having to be very practical and creative to make sure we generate strong ROI on the marketing investment.
That last point is the most important one to consider when you figure out how much to spend on marketing. The goal of a marketing investment is ROI—regardless of the number of dollars you budget. If you spend $50,000 on marketing this year, it needs to generate at least an additional $50,000 in profits than you generated last year—and, preferably, much more!
The only way to determine the right marketing budget for your business is to systematically measure your spend and your results year over year. Do a comparison, and over time you'll see a pattern that will help you determine the budget that gives you the best return. Only then will you know that your spending is just right.