Know-How Exchange : Strategy

Evaluating "percentage of revenue" basis versus industry averages or industry peers is not relevant because more information is needed to make this kind of decision. Comparing with industry peers doesn't help much because you may be in a different position with your industry peers; you may want to grow share - so you have to spend more to do so than your peers. Additionally, you may be more efficient in your marketing efforts than your peers so you would need to spend less on the average than they to achieve average results.

A better way to figure marketing budget is to do a bottom's up approach. Identify all of the marketing expenditures you can think of that would help to drive revenue short and long term. With your team, agree on a ranking system according to a "payback" criteria - revenue, profit, long term/short term impact, etc, and rank your list. Pare this list down to the ones that will make good impact for the money and are supportable. That becomes your baseline budget. When it comes to budgeting, generally, at some point, you have to fight for the programs versus other departments - like engineering, manufacturing, sales....Use the ranking process to justify your expenditures and to make compromises with other departments based on their projected paybacks.

I hope this helps.

Wayde

No easy answers. One client I worked with made it a general rule to spend 6% to 7% of sales on marketing, and within that the marketing department has reasonably free reign to allocate based on product life cycle and opportunity. They were generally dealing with products that had a 50% to 65% gross margin. That system worked pretty well. They would try to crank up the spend % on new products, but that ended up being less consistent and more political. Overall the process was fairly simple and predictable. Every industry is different and there is a lot of variation in gross margin to work with.

Do NOT use percentage-of-sales as the basis for determining marketing spending. You're almost guaranteed to have the wrong number.

The amount you spend on marketing should flow from the business and marketing objectives. First you decide what the objectives are, then how you'll accomplish those objectives, and (finally) what it will cost.

Once you've done that, you can divide the marketing spending by anticipated sales revenue (including any incremental volume you expect from the marketing activity), and you'll get the percentage number.

What that percentage number is will depend on your objectives, the industry, your position within the industry, the state of the economy, the value of your currency (if you're selling in multiple countries), the price of fuel, and a zillion other factors.

If you are fixated on a given percentage -- whether it's 1% or 35% -- you're looking at a number that's meaningless. Look instead at what you're trying to accomplish, how you are going about it, and what it is going to cost. That's how you set a marketing budget.

The problem, if there is one, is that many companies/managers have objectives that are more ambitious than their ability to achieve them -- either from a manpower/talent standpoint or from a financial standpoint, or both. They don't want to compromise their objectives, so they charge ahead with inadequate resources and then wonder why they missed the objectives yet again. (Duh!)

I don't have a solution for that one. Stupid is forever.