Honmuch shouldyou ilend onmaftelingfl

By Greg Stine Polaris, Inc.

fN ALL my years speaking with clients, workshop attenldees, and other business leaders, one of the questions I am asked most often is, "How much should I spend on marketing?"

Over the years, I have read books and heard other consultants and "experts" make broad statements regarding marketing budgets that, honestly, never made any sense to me. Businesses are so very different, I thought. Industries are different, for that matter. So for years I never attempted to answer that question directly in front of a group of business leaders or an audience because I figured, "It depends on your situation..."

Well,I was wrong.

And to go one step farther, anyone making a general statement about marketing budgets that isn't what I'm about to tell you is flat wrong.

A few years ago while I was working with a particularly analytical client (John Apgar, president of Owens Design), I was once again faced with this darn question, "How much should we be spending on our marketing?" Not only did he want my recommendation, but he wanted thoughtful evidence that it made sense for his company.

What surprised me was that in answering John's question, I also answered the question for almost everyone else: "About 57o of gross margin."

Wnu this malos sense.

First, let me tell the story of how I figured it out. (And when I say this, please understand that while I'm often humbled and confused about many things, this one 1 do have figured out, and it's pretty cool!)

To answer John's question, I did some research with companies I knew very well. I pulled together data for all the companies I have ever worked with and knew their internal revenue and profitability figures. I narrowed the list to companies that I knew had sustainable marketing programs-programs that function well and successfully do their jobs within a successful and profitable company.

Aside from great marketing programs, what did these companies have in common? Other than profitable bottom lines, not much. They ranged in size from a $2-million software companies to $200+ million manufacturers of near-commodity products.

Some of these companies had marketing budgets that were a very low percentage of sales (i.e., commodity manufacturers) and others had a very high percentage as compared to sales (i.e., software firms); thus' the ratio between marketing and total revenue was all over the map. This was no surprise and was why all the typical responses by "experts" make such little sense. However, the picture changed completely when I added an additional column to my spreadsheet: gross margin.

What I found was that for these successful companies. their annual marketing budgets all fell between 47o and 67o of their gross margin. Since I did the original analysis, I have mentally tested this model with a few dozen companies in a variety of industries and it has always held up. Allow me to explain further...

Flip it over and think of gross margin as the sum of a company's overhead plus profit. Companies with highmargins need more marketing (as a percentage of total revenue) to push their unique products and services successfully into the market, which requires powerful branding. They also have a business model able to provide the marketing budget. Companies with low margins typically are selling near-commodity products and services and there is less of a need (as a percentage oftotal revenue) for marketing or, honestly, differentiation.

Because all of these very successful companies are pri- ratclr ou'nccl I arrr not ut libct-tr trr shalc theil l'irrancirLl clata. but I'r c sccn rlozens ol conrl-rur.tics. closc Lr1t. that all lall into this plofiie:

Annultl Rcrcnuc: fllrngin!' liorrr 5l nrillion to o\ cr hl(X) nrillion rcvenrrc.

Gross Marsin: Rlnging ll'onr l0'l to ll-i'i ol fc\cnuc.

\ct l)r.ofit: E ll?i ol lcvcnuc.

Annuul Irarketing bLrcl!tct 1-6(r l)elccnt ol lrnnruLl gross nrargin (S).

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