Marketing budget benchmarks are less useful than your margin

Introduction

The usual answer to "how much should we spend on marketing" is a percentage of revenue, quoted with more confidence than the figure deserves.

Those percentages exist and they are a starting point at best. Two businesses with identical revenue and different margins should spend very different amounts, and the benchmark cannot see that.

1. Marketing budget benchmarks describe averages, not your business

The commonly cited ranges sit somewhere between a low single-digit percentage of revenue for established businesses and considerably more for those pursuing growth.

The problem is what the average conceals. It mixes businesses with 70% gross margins and businesses with 15%. It mixes those with strong repeat purchase and those selling once. It mixes markets where advertising is cheap with markets where it is not.

Use the range as a sanity check on the order of magnitude, and then derive your own number.

2. Start from gross margin, not revenue

The money available for marketing comes out of gross profit, so that is the correct base.

A business turning over a large amount at thin margin has less to spend than the revenue figure suggests. A business with high margins can afford considerably more than the benchmark implies and is often under-investing.

Calculate the percentage of gross profit you are willing to reinvest, which is a decision about growth against distributable profit rather than a lookup.

3. Work backwards from what a customer is worth

The most defensible method: decide what you can pay to acquire a customer, then multiply.

Take the gross margin a customer produces over a realistic relationship — a year is a reasonable horizon for most small businesses — and decide what share of that you will spend to win them. A third is a common working position.

That gives you a maximum acquisition cost. Multiply by the number of customers you want, and you have a budget derived from your own economics.

4. Check it against your payback period

A budget that is affordable in annual terms can still be unaffordable in monthly cash.

If a customer repays their acquisition cost over nine months, a large budget creates a cash gap even while being profitable on paper. That constraint frequently binds before the budget percentage does.

So size the budget on customer value and then constrain it by how many months of acquisition you can fund before the money returns.

5. Separate the budget into three parts

A single figure hides the important distinction.

Media spend, which buys attention. Production, which creates what the media distributes. And infrastructure, which is tooling, measurement and the systems that make the other two work.

Businesses routinely fund the first and starve the third, then wonder why the spend cannot be evaluated. A reasonable minimum for infrastructure early on is enough to know what is working.

6. Expect the ratio to change with maturity

The right percentage is not constant over time.

A business establishing itself, entering a new market or launching something spends a much higher share. An established business with strong repeat custom and referral flow spends less to stand still.

Which means a benchmark that fits you this year may not next year, and a falling ratio is often a sign of success rather than of underinvestment.

7. Set the floor as well as the ceiling

Most budget discussions concern the maximum. The minimum matters more.

Below a certain level, spend produces no learning: too few clicks to distinguish good from bad, too little volume to make a decision. Money spent below that threshold is a cost with no information attached.

Better to run one channel properly than four inadequately. If the budget only supports one meaningful test, run one meaningful test.

8. Review it quarterly against results, not annually against a percentage

An annual budget set as a percentage and then defended for twelve months is the worst arrangement.

Review quarterly against cost per customer and total contribution by channel. Increase where the numbers justify it, reduce where they do not, and be prepared to move between channels mid-year.

The benchmark question — what percentage should we spend — is much less useful than the operating question: is the last unit of spend still producing customers at an acceptable cost? When it stops, that is your ceiling, and it is a figure no benchmark can supply.

Conclusion

Treat published percentages as an order-of-magnitude check, then derive your own figure from gross margin and from what a customer is worth over a year.

Constrain it by payback period and cash, split it between media, production and infrastructure, expect the ratio to fall as the business matures, set a floor below which spend teaches you nothing, and review it quarterly against cost per customer rather than annually against a percentage.

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