“Spend 10% of revenue on marketing.”
It sounds simple. It also sounds responsible.
But it is not a strategy.
A percentage can be a useful benchmark, but it tells you nothing about what your business is trying to accomplish, how competitive your market is, what it costs to acquire a customer, or how quickly you want to grow.
A company trying to maintain its current position should not necessarily have the same marketing investment as one trying to grow revenue by 30%, enter a new market, or launch a new product.
The budget should follow the goal, not the other way around.
Start With the Growth Target
Let’s say your business generates $1 million in annual revenue. Using the 10% rule, your marketing budget would be $100,000. But what does that $100,000 need to accomplish? If your goal is to maintain $1 million in revenue, that budget may be more than enough. If your goal is to grow to $1.5 million, it may not be enough at all.
Instead, start with the additional $500,000 in revenue you want to create and work backward. How many new customers do you need? What is the average value of each customer? How many qualified leads does it take to close one sale? What does it cost to generate those leads?
Now you are building a budget around growth instead of an arbitrary percentage.
Know the Economics of Your Customer
Before deciding how much to invest, understand what a customer is worth and what it costs to acquire one.
Important numbers include:
- Customer Acquisition Cost (CAC)
- Customer Lifetime Value (LTV)
- Cost Per Lead (CPL)
- Conversion Rate
- Average Order Value or Contract Value
- Retention and repeat purchase rate
If a customer generates $10,000 in profit over the relationship, spending $1,000 to acquire that customer could make perfect sense. If the customer only produces $500 in profit, the same acquisition cost is unsustainable.
That is why two businesses generating the same revenue can require completely different marketing budgets.
Your Marketing Budget Is Not Your Ad Budget
Another problem with percentage rules is that they often get translated directly into advertising spend. Your budget may need to cover strategy, creative, content, website improvements, email marketing, SEO, CRM tools, analytics, events, agencies, freelancers, and internal staff.
If your marketing budget is $10,000 per month, putting all $10,000 into Google or Meta does not mean you have a strong marketing plan. You still need the system that turns attention into customers.
Match the Budget to the Ambition
A maintenance budget and a growth budget are not the same thing. If you want aggressive growth, you need enough resources to support aggressive growth. That does not mean spending recklessly. More money poured into weak messaging, poor conversion rates, or broken tracking will simply create more waste. The objective is to invest enough to hit the target while improving efficiency along the way.
Build the Budget Backward Step by Step
Start with the revenue target.
Determine how many customers you need.
Calculate the opportunities and leads required to produce those customers.
Estimate the cost of generating them.
Then add the people, technology, creative, and execution resources required to make the plan work. Ten percent of revenue may ultimately turn out to be the right number. It could also be 5%, or 15%.
The percentage is the result of the planning process. It should never be the strategy itself.
Not sure whether your marketing budget actually matches your growth goals? Book a free 30-minute call at 907k.com/call.