Marketing benchmarks will always give you an incomplete answer. This article gets you in the ballpark.
How much of your budget should your company allocate to marketing? While there is no single, easy answer to that question, you can pretty quickly arrive at a range using this guide.
Benchmarks are only one part of the story
There are some really great resources available that provide marketing spending benchmarks. When I was the CMO of a large, public company, marketing leaders from our divisions would often come to me and say, “We should be spending more in marketing in our division. It says so in the CMO benchmark survey!” The problem with benchmarks is that they are an average of a broad range of data, from a highly variable set of companies, and the data is often self-reported.
The data reporting can also be inconsistent based on the specificity of the survey instrument. For example, are product managers part of marketing or development? Is the entire CRM cost part of the marketing tech stack, or are the sales licenses charged to cost of sales? Are business development reps used for lead qualification part of sales or marketing? Is employee communications part of marketing? You get the point: there are many ways to define what is inside your total cost of marketing.
Regardless of their issues, benchmarks can be an important piece of the puzzle you need to assemble to define the right level of marketing investment for your company.
Some existing sources for benchmark data
Top down or bottom up?
The answer is “Yes.” You should look take both a top down and bottom up view of the marketing budget in your process. I recommend that you start with the top down approach first to make sure that you understand the high level constraints you are dealing with. In many companies, the budget is defined by the CEO or CFO. If you do your homework, you should be able to set the context for the marketing budget before it is handed down to you.
Once you have framed out a high level range of spending, it is critical to map your campaign plans and expected results to the objectives that you are being asked to sign up for.
Try our FREE benchmarking calculator to compare your budget.
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Factors that will drive differences from the benchmark data
Ideally, you should start with a benchmark report that has a segment that can be closely mapped to your company. The CMO Survey from Christine Moorman of Duke University is an incredibly valuable research study. The survey participants provide exhaustive data that is quite useful for overall insights and trends, but with 323 participants in the survey, you can see how you can resolve down to very small segments. The report breaks down the participants by economic sector (B2B vs. B2C and product vs. services), annual revenue, and industry sector (vertical). If you have revenue between $26-$100 million for example, you are one of 36 companies. But that segment might include a retailer and school - two very different marketing profiles.
The point is that even the best of reports (like this one from Christine Moorman) are only part of the answer.
Let’s explore the factors that might drive a variance from the benchmark data.
B2B vs. B2C vs. B2B2C. Marketing investment levels, strategies, and tactics vary greatly based on the target buyers and go-to-market model.
Product vs. services. The CMO Survey breaks out products vs. services, which can provide some interesting insights. Services typically have a relatively low gross margin because of the labor cost to deliver services. They also have a different level of scalability because of the potential scarcity in labor. Of course, there are lots of examples of high margin services (expensive consultants) and scalable service models (like Uber), but it does provide a potentially useful lens.
Industry vertical. The industry sector can also be interesting, but you still see a great deal of variability inside each sector.
Marketing strategy. The marketing strategy employed is a major variable and often overlooked. For example, if you have a targeted account approach (or ABM) vs. a digital demand generation strategy, or content marketing strategy, you will see a lot of variation in spending.
Buying metrics. The type of buying cycle and related metrics can be quite useful. For example, do you have a highly considered, expensive offer with a long sales cycle or a candy rack item sold in e-commerce stores?
Insource vs. outsource. A key decision based on your marketing strategy and your available resources is the level of outsourcing you use for your marketing. If you have a heavy content-based strategy, you may need to consider hiring a staff of content strategists and creators, or you may decide to outsource. In most cases, insourcing makes sense if you have a well established strategy, but it may change the way you think about your marketing budget.
What’s inside marketing? Not every marketing team includes the same stuff. For example, you may include product managers inside the marketing team while others will include them inside the R&D line. Marketing may be responsible for some of the sales technology stack, like the CRM system, while others include those investments in sales.
Approaching the answer through financial metrics
Because benchmarks alone can’t provide the answer, you need to also consider the financial metrics that are specific to your business.
Gross margin. Marketers are often tempted to look at revenue as the denominator for their spend ratios, but that is only part of the story. You need to understand how much of the pie needs to be reserved for delivering the product or service before you start divvying up the rest. If your company is a SaaS company, you likely have margins over 90%, but if you have a services business, a physical product, an affiliate model, or other product costs, you may have a much smaller percentage of revenue left over to fund business operations.
CAC targets. Many companies (especially SaaS companies) have a good understanding of their targets for costs to acquire a customer. This can provide an important limit to the amount that can be spent on sales and marketing to create new customers. For a detailed description of CAC, see this great article from Dave Kellogg: What Marketing Costs Should be Included in CAC Calculations?
Payback time. Related to your CAC targets, you need to understand how long it will take you to pay back the customer acquisition costs. For example, if you have a subscription business that charges $500 per month and you have a customer acquisition cost of $5,000, it will take about 11 months to recoup the costs if you have a 90% gross margin.
Customer LTV. Another important measure is the lifetime value of a customer. The LTV is a key determining factor of the CAC target. For example, if you have a subscription service that costs $10,000 per year for a typical customer and your churn rate is 10%, your lifetime value should be $100,000.
Growth rate. If your company is growing 50% year over year, it often makes sense to invest more to accelerate the growth. But if your revenues are flat, profitability is much more important and you will not be able to spend as much on marketing.
Profitability targets. Understanding your profitability targets will help you understand the practical range for the marketing investments. In high growth SaaS companies, you should consider the Rule of 40. In short, it means that your net income plus your growth rate should be at least 40%. For example, if you are growing at 60%, you can tolerate a 20% loss. If you are growing at 10%, you should have 30% net income. See this article from Dave Kellogg for more on the Rule of 40: The SaaS Rule of 40
The rest of the P&L. Finally, you need to understand the rest of the P&L for the business to make a recommendation. If you are investing heavily in product development, you may have to live with a lower investment in marketing to deliver on your profitability targets.
Putting it all together to get to your recommended marketing spend
So what’s the answer? With all of that background, it is time to come up with a recommendation. Here are the steps to get there:
- Start by defining the maximum operating range. Using the financial benchmarks above, you need to start with an upper bound for your marketing spending. You may have several ways to get to the answer - if you do, plot all of them. If you know the proposed P&L for all functions and the profit target, that will provide one data point. If you are a SaaS company and don’t have a profitability target, then back into the number with the Rule of 40. These numbers will provide a sense of the ceiling for your budget.
- Identify any relevant benchmarks. Next, look for existing benchmark data from one or more of the sources in the article above and plot them on the chart.
- Itemize unique differences in your company. Now list the unique characteristics of your company that would have a positive or negative influence on the number. For example, if you have a high growth rate, that would justify higher than normal spending. If you have low margins, that would imply a lower level of investment.
- Estimate an operating range. Finally, you need to make an editorial call. With the data in front of you, use your best judgement to define a budget range for marketing for your company.
Check against the bottoms up plan
Now that you have a top down range, you need to validate that the marketing spend will allow you to deliver on your marketing targets.
Does the marketing investment line up with the results you would achieve given the historical performance of marketing at your company? If it assumes an increase in performance (cost per lead, visibility, product launches, etc.) what is expected to change to deliver improved performance?
The details of the bottoms-up plan will be the subject of a future post. Stay tuned!