One morning, you wake up with the best idea ever: an idea that creates something incredibly unique or that solves a problem people didn’t even realise they had yet. You start working on it and get everything in place, until one day, you have a product in your hands. Let the customers and sales roll in!
But they’re not rolling in. Why not? Because potential customers have no idea your product exists.
If you’re working on a startup, it should be no news to you that marketing is an essential part of the success of your business. It is just as important as the product itself. One doesn’t work without the other. When you don’t have a marketing background or know-how, it can be especially difficult to decide how to allocate your budget. ‘How much should I spend on marketing?’ ‘Should it all be digital marketing, or are TV ads still a thing?’ A great place to start answering these questions is to see where other companies spend their money and how that’s working for them.
Marketing spend as part of revenue
A good way to analyse different marketing budgets is by looking at them as a percentage of revenue. This way, a single metric can be tracked and measured against a key performance figure and it makes it easily comparable against strategies from various businesses. Total marketing budgets as a percentage of revenue have flattened over the last few years. According to its CMO Spend Survey 2018-2019 report, Gartner found that companies (with $500 million to $10 billion or more in annual revenue) in North America and the UK spent on average 11.2% of their revenues on marketing in 2018. Of course, these figures represent relatively well-established businesses and brands that have already made their mark in their desired target markets, whereas startups and smaller businesses need to invest significantly more to achieve the same level of market awareness.
Although the numbers fell for two years running, the future of marketing looks bright. According to the 2018 Gartner CEO and Senior Business Executive Survey, 57% of CEOs expect to increase their investment in marketing in the coming year.
These numbers are all very interesting, but it’s important to note that there are significant differences between industries, as shown in The CMO Survey® of 2018. They report the following split among industry sectors:
- Education: 18.5%
- Communications/Media: 17.8%
- Consumer services: 10.7%
- Tech/Software/Biotech: 9.7%
- Healthcare: 9.5%
- Consumer Packaged Goods: 8.1%
- Banking/Finance/Insurance: 5.3%
- Retail/Wholesale: 4.7%
- Transportation: 4.1%
- Service Consulting: 3.4%
- Mining/Construction: 1%
- Energy: 0.5%
That same CMO Survey® shows that companies that make more than 10% of sales online allocate 13% of their total budget to marketing, compared with companies without internet sales, which allocate 10.65% of their budgets to marketing. This shows that the 2.4% difference makes a significant difference. Of course, for some industries online sales simply aren’t very relevant.
The continued rise of digital marketing
Although overall marketing budgets as a percentage of revenue are stagnating, digital marketing is rapidly accounting for a bigger slice of the pie, often at the expense of traditional marketing. For example, Marketing Charts estimated, based on the PwC 5-year outlook, in 2018,digital advertising in the US was nearly $30 billion larger than TV advertising.
Gartner’s CMO Spend Survey broke down the numbers. ‘Spending on digital commerce chimes with CEOs’ digitization goals,’ Gartner reports. ‘In a Gartner survey of 460 CEOs and senior business leaders last year, 62% of respondents said they have a management initiative or transformation program underway to make their business more digital.’ This was true for CEOs of both B2B and B2C companies.
Singling out specific companies to look at what they do is usually not very relevant as they are too case-specific, but it can be insightful nonetheless. Salesforce is reported to spend a whopping 46% of their revenue on sales and marketing, contributing to 25% revenue growth year-over-year. Tableau, another SaaS company and relatively new to the market, went even further and invested more than half their revenues (51%) in sales and marketing, helping with the 32% revenue growth. On the other hand, Apple invested a modest 6.3%, and Google went up to 11.9%, yet Apple’s sales growth was 15.8% and Google’s revenue growth 23.4%. Looking at consumers brands, in 2018 Nike spent 10% of its revenue, contributing to a mere 5.6% revenue growth. This level of marketing budget is more in line with the previously mentioned companies that rely less on online sales.
Of course, every company is unique, so it’s hard to draw conclusions based on the numbers of individual companies. A reason SaaS companies invest heavily in sales and marketing – and doing so successfully – could be along the lines of ‘practise what you preach’. With both companies offering software closely linked to sales and marketing, it makes sense that they themselves place many eggs in that basket.
Comparing Tableau to companies like Google and Apple, brand awareness probably is a big factor in the different budget allocations. Apple, Google and Nike hold respectively the #1, #2 and #14 position of the world’s most valuable brands, according to Forbes, whereas Tableau is the new kid on the block that still needs to invest in brand awareness and loyalty.
It’s an important takeaway for entrepreneurs and SMEs. There is no magic number of how much to invest; it depends on your industry, your product, your growth aspirations and you have to keep the stage of your business life cycle in mind. For example, B2C companies typically invest more than B2B in marketing channels to reach various customer segments. Having said that, it should come as no surprise that digital marketing is here to stay, no matter where you’re at.