What percent of revenue should go to advertising?

Obviously, different businesses have different strategies when it comes to advertising. Some work on a shoestring budget, and spend almost nothing, while others get almost all their leads from paid advertising.

But when it comes to establishing a range for what is “normal” does anyone have any ideas?

To make an example that would be somewhat mainstream, I am going assume we have a business that makes $10,000 per month, and has a gross profit of 30% (so $3000 in profit). I would love to come up with an answer to the following:

  1. What would be a the minimum and maximum advertising budget?
  2. What would be about average?

I am going to guess the average is $1000 or 10%, but would love to see what others have to offer.

I have no idea what the average but I would throw in the following thoughts:

  1. I’m not sure I’d consider the profit margin much in deciding the marketing budget. I have spent periods where my marketing expense was incredibly high and it ate my entire margin, but over a 12 month period we achieved some real growth which was our goal. Marketing has different goals, and businesses go through different phases, i.e. product launch, high season, etc.

  2. The marketing budget should sort of ‘decide itself’ if you are lucky. I hired a [really expensive] marketing consultant about 6 years ago and, after some research, she came up with a bunch of interesting figures. Lots of information, but the most useful part was that she came up with an average revenue per customer and a projected cost per customer acquisition. The math became pretty easy at that point - our business scaled very well so we could take on as many new customers as we could afford to acquire. I was planing on selling the business within 3 years so it seemed like a good idea to up the marketing budget as much as possible and push for growth. That company lost about 25k that year, and in retrospect I wouldn’t have minded pouring in more money because when the company sold, it was the big client list AND the market research that really brought the most value.

If I had a business that brought in 10k of revenue and a net profit of 3k per month:

  • if for every $1000 of marketing I put in, I expected to increase sales by 10% then I’d up the marketing budget to eat up all available cash

  • if for every $1000 of marketing I put in, I expected to increase sales by 2%, I’d stop spending money on marketing and find a better marketing strategy.

If I wasn’t sure how the numbers worked, I would spend my marketing money on a consultant who could do some market research, understand the business model, and provide a good strategy for the business where I could make investments based on projected increases in revenue.

Of course, no plan can see the future, but if you can project some numbers these kinds of decisions become easy.

Over the years I’ve learned this: if you fine a marketing channel that works, then work it like there’s no tomorrow. There was a period where we were selling tons of Joomla services and our Adwords conversion suddenly doubled - this mean that the return on investment was great and I upped the budget massively until it started to peter out.

The reverse is true, too. If you are marketing and it’s not really working, then quit it and make a new plan.

I always found that a kinda funny question myself.

I think if you’re a larger company more focused on “branding” and you don’t know how much money you’re making from the different advertising campaigns you run - then picking a percentage to reinvest is acceptable - but as a small business owner where every dollar in profit counts, I’d think you’d work hard to develop marketing that results in a positive ROI.

Then once you know you’ll make $500 in profit for every $100 you spend marketing, why would you limit yourself to reinvesting just a small portion of your profits?

Sure there might be a practical limit to how much you can reinvest if you want to keep your business smaller and more manageable, but if you can adapt to easily sell more products or services, I don’t see why someone wouldn’t.

Like you if I had to guess I’d say 10% is probably the norm, but I can’t see why someone would limit themselves if they knew their marketing produced a positive ROI.

I think that a big company who doesn’t know how much money they are expecting to make on advertising isn’t gonna last long. A large company needs to have a marketing team who makes these kinds of decisions based on the hardest data available.

Branding is a bit different, but it can still have the same dynamic. For example, you can’t say that ‘if we do this much branding then we’ll get that much revenue’ but you can still have a specific branding/positioning goal and budget for that goal. It’s like overhead to the advertising.

> Obviously, different businesses have different strategies when it comes to advertising. Some work on a shoestring budget, and spend almost nothing, while others get almost all their leads from paid advertising.

and some will figure the best advertising is doing a great job, so rather than support media companies spend resources on being able to do things better – this is very much the way things are going i think; baking the goodness in and doing it rather than creating imagery and talking about it. in fact marketing/advertising and the service/product gets blurred which is good. e.g. consider the tracking thing on fedex. is that marketing or part of the service? from within the company when the idea was first born i reckon it seemed like marketing. to a user of the company it’s part of the service. the marketing is so useful it’s not even seen as marketing by customers but part of the service. now that is the goal imo. make the marketing add so much value it isn’t even seen as marketing. so your question then becomes, how much should companies feed back into their business?