Businesses often ask ‘what is the right amount of money to spend on marketing’
It is fairly safe to say the answer is between 1% and 25% of on-going revenue – but that’s a pretty big range and potentially a lot of money, so let’s look more closely…
I’ve been asked about optimum marketing spend levels by CEO’s and Boards of organisations of every size and type (some of whom clearly already have very large budgets and marketing teams). Those teams and agencies aren’t always trusted to set their own budgets though.
As an independent advisor I’ll always try to answer as simply as possible; yet, in truth, this is a complex area and getting to grips with it often needs creativity with careful testing and analysis to arrive at the best solution. This sort of review can and often is done independently, so I thought it worth setting out my core process and thoughts on the subject.
The first question I’ll tend to ask is :
What exactly are your goals and expectations for Marketing ?
Of course Marketing Strategy overall is a very large and complex area. Generally though when I’m being asked about spend it seems that Product, Price etc. is well (enough) mapped out and the question actually is focussed on the remaining Brand/Awareness/Publicity/Sales/Promotion aspects rather than the other marketing P’s. So I am going to further focus the question by assuming that the Product and price are in place; that the Marketing Goal is optimised profitability; and that all ‘variable’ marketing activity is to be measured against a goal of incremental revenue/profit generation. In contrast creative work and/or PR that is not intended to generate profit in the short term is excluded at this stage*
On that basis the first consideration is always fully covering the basics:
At a minimum being immediately findable via Google, the Phone book, Trade Directories etc. is going to be of value to most businesses. This is actually very cheap so no excuses are accepted here! In some cases ‘the basics’ may also include a certification, trade membership, a place at a trade show, facilities for demonstration or review of product etc.
Beyond that ask yourself ‘do you now need to attract and/or compete for business ?’ Potential customers looking for a venue, product or service today will see often multiple options and can be helped in your direction by a simple but reputable looking website or brochure and some examples of what’s on offer. Again these marketing tools are using your own words, testimonials, media etc. and can also be done very economically.
Why not stop there? Well some businesses can and should stop there. For others there are reasons to raise the game further:
Three main reasons why you might need to invest more:
- You need to generate a presence; a ‘shop’ or premises to provide or deliver a service (or to persuade a shop owner to offer them)
- The market does not yet know it needs your product or service at all – or currently knows the ‘wrong thing’ about them
- The product or service category is established but you have to actively compete with an established, big budget or well known brand to get where you want in the market
Let’s look at those three in a little more detail:
- Having your own premises is clearly a reasonable or essential idea if you are going to operate a Hotel or a Restaurant. It also works as a permanent advertisement for passing traffic. Other businesses like replacement windows or blinds, building trades, magazine or DVD sales, electronic components etc. can be made to work with or without retail premises.
At the other extreme : If you are going to manufacture or distribute just one item e.g. a kitchen tap, then enlisting the help of established kitchen and plumbing outlets will be a far better idea than opening your own shop (although the retailers will of course want a substantial share of the selling price and to see some marketing support behind the product)
- A new product or service has its own challenges: Before we knew we needed Smart-phones, or carpet cleaners or LED lighting there was a marketing task to establish the need and the category. A potential upside for all the extra risk and investment in new products is that the innovators in these launch scenarios can also become the de-facto market leader . . but that link is less certain and less long-lasting than many assume.
- Which takes us to established categories. If you want to launch a branded rival to Coca-Cola and see it selling side by side on supermarket shelves you had better be prepared to spend some serious money. The market already has availability, choice (Pepsi), cheaper priced alternatives (own brand) and the supermarkets will want you to buy your way onto their finite shelves and guarantee them levels of advertising etc. to ensure the new product sells through in way that is more profitable for them than the product you hope to displace. Not an easy task for a challenger brand.
Today new Car, Food, Electronics and other launches have set expectations of high budgets and complex campaigns to cut through in ‘noisy’ markets and establish and hold a market share. Yet it must be said that even with apparently sophisticated marketing plans and eye-wateringly large budgets this type of launch can still fail; with the risks heightened further when the company extends itself out of a traditional market or category or moves from services to products.
So returning to our question : The degree of challenge posed by all these Market and Company issues vs. current results needs to be professionally assessing by someone with the experience and skill to ensure the right analysis and discussions result in a tentative budget in place of the right order of magnitude. It is also important to point out that trying several new things generally implies some failures; so sophisticated techniques are needed to avoid a disproportional amount of budget wastage during very early experimentation.
Although I’ve already identified the basics we also need to look in more depth at the ‘what and how’ of marketing – The activities that will make up our chosen ‘marketing mix’.
Optimising Spend for the best Return On Investment (ROI)
So on the way to arriving at an optimised budget it is worth remembering that the ‘Marketing Mix’ is a particular and unique blend of the range of ‘externally felt’ activities you spend marketing money on – from people knocking on doors or handing out leaflets through web ads, newspaper ads, direct mail, Posters, Radio, TV etc. etc.
Each of these media is appropriate for slightly different purposes and can carry slightly different messages in different ways. Each has different setup and on-going costs. Add to that ‘traditional list’ the New Media including Twitter, Facebook, Forums/Websites etc.
In each of these ‘spend’ areas you can experiment systematically with investment and activity levels, messages, timing, special offers, tracking mechanisms etc. until it becomes clear which ‘spend’ is actually delivering which results; and if each of the areas can be considered to work alone or only in combination with other ‘spends’ or offers.
A note on New Media
A key issue here is that while you can vary a TV or press advertising spend repeatedly in a very controlled manner and over a significant range to look at the effects it is harder to vary the cost of a Twitter or Facebook presence in the same way. This tends to lead to PR difficulties and to unwanted over-commitment to Twitter etc. The issue is that once you have decided you ‘need’ to be on Twitter 24/7 you have thus effectively set a ‘rapid response SLA’ for yourself in the consumers mind so you’ll need have ‘PR-savvy’ staff members available or on immediate Call-out at all hours : This despite the fact that 364 days of the year not much will he happening and what is happening can be managed in spare time.
Several big brands have been hit by setting up Twitter etc. and using it as a “PR” outlet in this way. . Then there is a product or service problem (maybe not yours even) and the Twitter profile and Facebook page are besieged by unhappy customers who are complaining and circulating stories with each other in real time and decrying the companies lack of equally real time response. This can be addressed in the way these new media are set up, positioned and internally managed but it is a complex and tricky part of the mix to vary at low spend levels.
Scientific approach to Optimisation
However for most spend areas testing is relatively easy and done correctly this should fairly quickly establish a fact-based understanding of what each element of the mix can (and is) achieving. Systematic experimentation should also verify it’s cost sensitivity (e.g. what happens if that spend or effort is doubled or halved). This is a reasonably complex job and needs to be done pragmatically. Leadership and open communication is needed too as it is not uncommon for specialists in these areas to be wary or resistant to the process or to dispute the relevance or measurement of ROI in their areas.
So the answer to the ‘How much to Spend’ question is going to be different for every company, product, service or message and may also vary over time or with market/competitor activity.
As I hope I have shown; approaching the question actively and systematically should reveal a level where the Return On Investment (ROI in sales or profits) on Marketing spend is demonstrably optimised and positive (2:1 is a good goal I’ve regularly achieved). This sort of data in hand makes ‘Budget time at the Board’ a far happier event than before.
This illustrative chart has £500,000 of revenue as a baseline and shows that in this particular case – even if doing all the right things – spending less than 10% on them proves a poor or ineffective move in ROI terms. The optimum ROI (Red curve) is actually found at around 14%. Beyond that the ROI in this scenario is falling (but still positive) as investment is increased further. In this example the Total Revenue line has apparently ‘plateaued’ – something which may well merit further investigation.
The main insights are that
The best financial results are delivered over quite a narrow range of spend;
it is possible to spend far more than is optimum while getting apparently ‘good’ results that are not optimum;
Some sort of market response or saturation was noted: Perhaps product or geographic diversification ought to be considered to further step-change the revenue line going forwards.
In conclusion :
A business with this level of information not only knows their ‘Right Percentage’ but now :
- Can make smart decisions on Market dynamics and their own marketing mix and
- Knows how to plan what to spend on Marketing overall and
- Knows how good Marketing can tactically deliver revenue, profit and growth on demand!
* I’ll be the first to agree there is a role for ‘Brand’ building and PR type campaigns in many more sophisticated marketing environments but in some cases it can be very hard to quantify results. My approach there is to optimise what does generate (or protect) quantifiable ROI results then re-look at the remainder in the light of the Company and Brand goals over time.
Clearly this is a very much simplified guide to a very complex subject. I have also written too little about the very significant need to involve the agency or creative teams in this process to ensure that a brief wanting to generate revenue does not get somehow transformed into a brief or ad to ‘inform’, look cool, edgy or sexy etc. which may or may not happen to deliver early revenue to the advertiser. Managing this process could well be another Blog page at some point !
Thank you for reading this far, I’d welcome any comments below!