independent

Sunday 20 April 2014

Incur marketing costs today to build towards profits tomorrow

Deciding how much you should spend on marketing is a big question not only for small firms, but for those with sales and marketing departments.

In the current environment it has become even more of an issue if you have to sell your marketing budget to other executives.

Looking at marketing spend as a percentage of revenue (or, the Marketing Budget Ratio) is the most common way to set and justify marketing spend.

It is an easy approach, and as US marketing and sales guru Mac McIntosh (www.sales-lead-experts.com) points out, it is better than just taking last year's budget and subjectively adding or cutting based on what you think worked.

Under this approach you look at what you plan to make in sales in the coming year and multiply that figure by a percentage to reach your marketing budget for the coming year.

McIntosh points out that for business-to-business marketers, 4pc (excluding personnel costs) is a common multiplier.

Tech firms

For tech firms, the IDC 2012 CMO Tech Marketing Barometer (www.idc.com) refers to a marketing and sales budget ratio which calculates marketing and sales investment as a percentage of revenue.

The industry benchmark in this area is 10.6pc, but that number will vary depending on the company environment – a services company will generally have a lower ratio, and a software company will have a higher ratio.

Of the total dollars (it's a US-based survey) invested in sales and marketing, the industry split between sales and marketing is 4:1. That means for every dollar spent on marketing four are spent on sales.

IDC reports that buyers are continually telling them that sales teams are pursuing them too hard. IDC believes that the current model of four sales dollars per marketing dollar is imbalanced and that companies should instead shift some funds into marketing.

Markets

The difficulty with the numbers from IDC and others is that they are an average of large tech companies. Many of these companies are in mature markets and some earn significant revenue from maintenance.

This skews down the average marketing spend compared to smaller, fast growing companies – companies that typically require a much higher percentage of revenue for marketing.

A better way to justify your marketing budget is to think of it as an investment that incurs costs today but delivers benefits for many years.

Demand generation spending is the easiest marketing investment to tie to ROI. Some programmes generate leads, others nurture leads as they move through the marketing funnel.

When the leads become ready, they are transferred to sales and become opportunities, some of which eventually close and translate to revenue.

Other marketing investments, such as brand building and PR, are harder to tie to revenue without making assumptions. But that doesn't mean you shouldn't try.

For all types of marketing investment, the returns are usually not immediate and often come months or years down the road. Thinking of the marketing budget as a long-term investment can be especially important for smaller, fast growing firms.

By treating your B2B marketing budget like an investment in the future, you can help build the perception that marketing is an asset that drives revenue, not a liability that simply incurs costs.

Fergus Gloster is managing director EMEA of marketing software company Marketo (www.marketo.com)

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