How much should I spend on marketing and advertising?

by Mauricio Romero Mauricio Romero | Jan 18, 2023 8:30:00 AM

Markteing and advertising budget for medium, large and small companies.A correct marketing and advertising budget will depend on the size of the company, the goals you want to achieve, and how fast you want results. Discover the principles involved:

7% Rule of thumb for marketing budgets

After 26 years of professional experience plus a marketing Bachelor's degree, and an MBA degree, being involved and studying more than 700 marketing business cases, there is a rule of thumb for this question. First, you need to spend a percentage of your sales or, having a more academic term, your gross revenue on marketing and advertising. The magic number is around 7%.

Some experts say that the minimum is 5% of your total Income. If you invest less than that and have good results, you perform magic spells on your friends and family to get leads, and of course, the scale of your business is small.

7% is the conservative number. Not too high or small.

But if you want to be aggressive and have speedy results, the percentage will go up from 10% to 20%. Trying to find out which one is good for your business will depend on the following:

  1. Size of the business
  2. Marketing goals (Strategy)
  3. Speed of the outcome

1 Marketing budget depending on the size of your business

In reality, generating a lead from scratch might cost more than 7% of the gross revenue if your business is too small or you are entering a new market with no real presence in your audience's mind.

The goals of any marketing and advertising campaign are:

  • Generate brand awareness (more people know we exist)
  • Generate leads (people that need our service/product)
  • Generate customers (people that use our service/product)

So basically is expanding the reach of your voice to the right people at the right moment. We have conversion rates gathered from millions of statistical results to go from one stage to another. We have to do it backward.

  • To get one client, you need ten leads. Lead to client conversion rate of 10%.  A visitor is someone that shows interest in your service/product.
  • To get ten leads, you need 667 visitors. Visitor to lead rate of 1.5%. A visitor is someone that shows interest in your service/product.
  • To get 667 visitors, you need to reach 22,223 people in your audience. This example is a 3% conversion rate. Reach can also be called impacts or clicks, and advertisers can give you a cost per mille, per click, or impression. Mainly they refer to the number of people that saw your message.

Of course, the conversion rates may vary, but the percentages I gave you are the reality in most cases.

  1. Reach (Number of people who see your ad)
  2. 22,223
  3. Conversion rate 3.00%
  4. Visitor (Number of people visiting your web or landing page)
  5. 667
  6. Conversion rate1.50%
  7. Leads (Number of people showing interest in the product/service)
  8. 10
  9. Conversion rate10.00%
  10. Customer (Number of buyers)
  • So if the COR cost of reach is .34, your cost for acquiring that client is ($.34 X 22,223 = $8,000); if you follow the rule of thumb that eight thousand dollar cost is the 7% budget of your product price, your product must cost $114,285.
  • The same example applied to TV. The cost per Mille on TV is 19.95 dollars. (22,223 / 1,000 = 22.2 ) (22.2 X $19.95=$443.35) The cost of customer acquisition is $443.35
  • Let's see the example of a traditional mailing campaign. In this case, we will use the number of visitors because you are reaching them directly. The cost for a postcard is $1.3 X 667 visitors = $866.6 per acquired customer.

We can learn from these examples that lead cost or customer acquisition may exceed the 7% thumb rule; this might be true if you are a small business or the product/service you provide is a low price.

What to do when the percentage cost for client acquisition exceeds your budget?

You have to estimate the customer acquisition cost not by one sale but by the customer's lifetime expense. For example, a supermarket customer will spend $100 per week for five years. So that customer will spend (52 weeks X $100 = $5,200 X 5 years = $26,000). Doing this allows you to look through time and justify a customer acquisition, even if it seems too high for your business.

2 Marketing budget depending on your Marketing goals (Strategy)

Brand Awareness Strategy.

On many occasions, your strategy should look for more than an immediate return. Investing in brand awareness is the most common strategy when building your brand. The goal of brand awareness is to make people know that you exist and they recognize your company in the niche.

You can set up any budget in this case, whether small or extensive, and the secret is to be constant. Never stop publishing your content. The only way people will remember your brand and then recognize it is through repetition. Always be present.

Big businesses have the budget to publish in traditional media and digital media. However, medium and small businesses will do it on digital paid advertising and social media. To make it work, you need to publish as many times in all the media as possible and don't stop doing it.

If you want it to work fast, you need to increase visibility through more channels and repetition; of course, this will significantly impact the budget. 

A big business can have a budget of several million dollars per month to do this. A medium-sized business will invest from five thousand to twenty thousand dollars monthly. Small companies will do it on a budget from five hundred dollars up to five thousand dollars per month. But, of course, small budgets will turn into results that will take much longer to have an impact.

Lead Generation Strategy

In a lead generation campaign, you have to be realistic and play with real numbers and long projections in time. Scaling through time is the goal, and you will be successful in a five-year term.

The strategy is to become the most trusted source of information in your industry, so you will be present with content when someone has a question about your niche in the digital space.

To become the Wikipedia of your industry, you need a big website addressing all your client's questions. Content strategy with Inbound Marketing is the Methodology and tactics applied.

A company's regular budget in this strategy can go from five thousand dollars to forty thousand dollars per month. Small companies can still do it, but regularly they don't have the time to do the content and publish it on social media.

Market penetration

This is the most aggressive strategy, and the goal is to generate immediate sales in the minimum time possible. Saturation of content in specific media channels is needed. Think of extensive campaigns like when Apple releases a new product. Or when Starbucks saturates a city's downtown with two stores on the same street front of each other.

More than revenue, this strategy is aggressively taking a piece of market share from the competition and getting into audience awareness quickly. As a result, the profit will come later even though the campaign exceeds the Income marketing budget ratio. 

When you reach the goal of enough brand awareness, and your lead generation is constant and having an actual market share is when you can expect to have a 7% of your gross income applied to marketing.

3 Marketing budget depending on the Speed of the Outcome

How fast do you want results? It is a triangle game with three concepts:

  1. Money
  2. Time
  3. Quality results

The problem here is that you can only choose two.

  1. Your budget will be high if you don't have time and want fast results.
  2. You will need time if you have little money and want quality results.
  3. And if you don't have enough time or money, your quality results won't be a reality.

As you can see, having a proper marketing budget is challenging. Only the right vision of time and money will set the right outcome expectation. The biggest misconception is that you will get fast results with small budgets, and unfortunately, to scale your brand visibility, you will need time or money.

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