How Much Should You Spend On Digital Marketing?
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Marketing Ignite Blog

I’d like to think that by now, most companies know how crucial digital marketing is for growth. And if you’re here reading this, it means that you’re already convinced of the power of digital marketing to boost your business.

The growth of digital marketing is fast accelerating, with no signs of slowing down. In the face of the growing opportunities in the web, many marketers are wondering how they can effectively tap into the trend while staying on top of their expenses.

Maybe it’s your first time trying to figure out how to create a digital marketing budget. Or maybe you’re wondering if you’re spending enough on digital marketing. Whatever the case is, in this article, you’ll find the answers to the following:

  • What is the average marketing budget by industry?
  • How do you choose a budget for digital marketing?
  • How do digital marketing budgets differ according to industries?
  • What expenses should you include in your digital marketing budget?
  • What specific strategies should you spend most of your budget on?

Understanding the ins and outs of how much should a company spend in marketing will help you ensure that every cent of your budget counts.

Determining Your Marketing Budget

Before you determine how much should you spend on digital marketing, you should first decide your marketing budget. As recommended by the U.S. Small Business Administration, the American Marketing Association, and Duke University, the percentage of a company’s budget that’s allocated on marketing varies according to the company’s gross revenue:

  • Less than $5 million in annual gross revenue = 7 to 8 percent
  • $5 million to less than $25 million = 11 percent
  • $25 million to $99 million = 9 percent

In short, your marketing budget is anywhere from 7 to 11 percent, with yours skewing on the lower side if you’re a small business.

While these averages are good starting points, the actual percentage should depend on a number of factors:

  • The industry you’re in
  • The size of your business
  • Its growth stage

For instance, during the early brand-building years, a retail business spends up to 20 percent of sales on marketing – much more than other businesses do.

This budget should then be allocated to (1) brand development costs including expenses for developing your website, sales collateral, etc. and (2) business promotion costs such as advertising, campaigns, and events.

The SBA adds that the suggested percentage for <$5million companies assumes that you have 10-12 percent in margins. If your margins are lower than this, you should consider allocating additional spending to marketing and lowering your overall margins to eat up more of the expenses of doing business.

Average Marketing Budget by Industry

Benchmarking is a great way to figure out how much you’ should be spending on marketing. This graph from a 2017 CMO report shows the average marketing spending as a percentage of company revenues by various industries:

As shown in the graph, the Consumer Services industry sector had the biggest percentage at 18.9 percent while the Manufacturing industry had the lowest percentage at 2.4 percent.

B2B vs. B2C: Marketing Budget as Percent of Company Budget

As shown in the graph below from a CMO report in August 2018, the nature of your industry largely influences how much of your company budget is going to be spent on marketing.

As of August 2018, on average across all industries, 10.8 percent of the company budget is spent on marketing, a slight dip from 11.4 percent in the past year.

As expected, B2C product companies allocate the biggest marketing budget as a percent of company budget at 17.2 percent while B2B product companies have the smallest marketing budget as a percent of company budget at 8.5 percent.

It’s also interesting to note that Communications/Media, Consumer Services, and Consumer Packaged Goods are the industry sectors that spent the most on marketing from their overall company budgets while Mining/Construction, Energy, and Manufacturing are the bottom three.

B2B vs. B2C: Marketing Budget as Percent of Company Revenue

A different trend can be seen in companies’ marketing spending as a percent of their revenue. From 6.9 percent in August 2017, it spiked to 7.3 percent in August 2018, with the biggest percentage in the B2C Product sector and the smallest in the B2B Product sector.

The industry sectors that allocate the biggest percentages of their revenue for marketing spending are Education, Communications/Media, and Consumer Services, and the least are the Energy, Mining/Construction, and Manufacturing.

Quick recap: Your marketing budget should be anywhere from 7 to 11 percent, with yours leaning on the lower side (or even lower than 7 percent) if you’re a small business.

Getting the Most Out Of a Marketing Budget for Small Businesses

Money is tight for many small businesses, and understandably so. This makes it crucial to ensure to get the most bang for your buck when it comes to marketing.

Even a 2-3% marketing budget can yield high results with the right strategies and implementation. A common but highly effective strategy for marketing small businesses is to focus on 3 areas:

  • Word-of-mouth referrals
  • Search Marketing
  • Advertising

Word-Of-Mouth Referrals

Many marketers consider word-of-mouth marketing, or WOMM, the undisputed king of all marketing methods.

Here’s why:

Most people, even up to 92% of people according to Nielsen, trust recommendations from family and friends over any other type of advertising.

In an article published in the International Journal of Market Research, M. Nick Hajili wrote

How do you encourage word-of-mouth referrals? Provide an exceptional product/service and a delightful experience, and referrals will flow naturally out of your clients’ mouths and out to the big world of social media.

Search Marketing

You’d also want to invest in search marketing. Search marketing is divided into two: Search Engine Marketing (SEM) and Search Engine Optimization (SEO).

SEM is paying a search engine like Google to display your website on the results page when people search for a keyword or phrase that you specify. Most SEM platforms, including Google Ads and Bing Ads, only require you to pay when someone clicks on your ad.

SEO is optimizing your website to increase its visibility on search engines. The goal is to rank on the first page of a search engine to get consistent traffic. It takes longer to see results, but the return is 10x your investment.

It’s best to invest in both. Use SEM to meet your minimum sales requirements today to keep things afloat while also investing what’s left on SEO efforts.

How to Create a Digital Marketing Budget

Once you have your marketing budget, it’s time to determine what percentage of it you would allocate on digital marketing. At this point, it helps to look at the trends in digital marketing spend, how much businesses in various industry sectors are spending on digital marketing, and how to identify how much your company should spend on it.

Trends in Digital Marketing Spend

It’s no secret that digital marketing has been steadily growing in the past years. According to the Nielsen CMO Report 2018, 82 percent of marketers plan on increasing their digital marketing budget by 49 percent more than their budget in 2018.

This same report shows that 44 percent of marketers plan on reducing traditional media spending by 5 percent on average. It was in 2017 when digital spend surpassed total TV advertising spend in the US for the first time in history – with a whopping $72.01 billion spent on TV and $77.37 billion spent on digital marketing.

Some estimates even suggest that digital spend will be 36% higher than TV advertisement in the US by 2020.

What’s driving the spike in digital marketing spend? There’s one simple answer: results of digital marketing efforts are a lot easier to quantify than traditional marketing efforts.

In fact, around 74 percent of marketers are confident that they can measure the ROI of their digital efforts, in contrast to just 59 percent of marketers who feel that they can measure the results of their print or TV ads.

According to a report by the Digital Marketing Institute, digital marketing is better for measuring results, targeting specific audiences, reaching more people, and providing

According to reports from Forrester Research and also eMarketer, in 2018 the average company is expecting to allocate 41% of their marketing budget to digital methods.

A 2018 CMO report reflects this trend as it found that businesses are planning on increasing their digital marketing spend from 44.3% to 54.1% over the next 5 years. This is while reducing their non-digital spending from 55.3% to 45.4% in the same timeframe.

The general trend is smaller companies tend to spend more on digital marketing because of the prohibitive cost of traditional advertising. Digital marketing can be affordable (if done right) and provides a potentially high and measurable ROI.

How Much Should You Spend On Digital Marketing?

Just for a recap, SMA recommends spending 7 to 11 percent of your budget on marketing depending on your company’s revenue. The big majority of this budget should be spent in digital marketing.

While this is a good starting point, how much you should spend on digital marketing is going to be influenced by the following factors:

  • Your goals
  • The industry you’re in
  • The customers you’re trying to target

Your goals. Your digital marketing spend should be based on the goals that you have for your company. For example, if you want to get more qualified leads for your financial consultancy service for retirees, then you have to invest in producing and amplifying high-quality lead magnets.

Let’s take a look at what marketers consider the most important goals that a digital marketing campaign should achieve:

This is why it’s so important to have an existing marketing plan. Not only will this plan show your goals and objectives for marketing your business, but it will give you a basis for how much you’ll have to spend to get to those goals.

Remember:

More often than not, you can’t get massive results with minimal investments. If you want to see massive year-on-year growth for your company, you’ll have to be willing to spend the money to get there, and you’ll have to know how much you actually need to spend.

Your industry. An important step to take in determining how much should you spend on digital marketing is researching the trend in your industry so you can get an idea of how much your competitors are spending.

As shown by the graph below from Marketing Charts, companies in the retail sector spend more on digital marketing than those in the healthcare and pharmaceuticals sector. This is because, in retail, it’s increasingly becoming a search marketing game

Marketing Budget Breakdown: What to Include In Your Digital Marketing Budget

Having an idea of how much you should spend on digital marketing is one thing, but knowing how to spend it is another. A digital marketing budget should account for all expenses related to marketing online, from the salary of your digital marketing staff to the cost of maintaining your company website.

Here’s a snapshot of the expenses commonly included in marketing budgets from the CMO 2018 Report:

Since the percentages in this graph reflect the number of marketers that agree that the expense is included in their companies’ marketing budgets, it can be inferred that the breakdown of a digital marketing budget is going to differ from company to company.

Some companies may include sales-related expenses such as the salary of their sales employees and their sales support tools in the budget while some may not.

What’s commonly agreed is the inclusion of direct expenses of marketing activities (such as trade promotions, advertising, and direct marketing) and social media expenses.

As seen here, 47 percent of marketers include marketing training in their budget. Considering the widespread shortage of skilled digital marketing staff, the average spending on marketing training and development has been increasing over the past 5 years:

This is from the latest CMO Report for February 2019, and as seen above, an average of 4.7 percent of marketing budgets are allocated to marketing training and development as opposed to 3.4 percent 5 years ago.

Strikingly, B2B Services are spending 150% more on training than their B2C counterparts. Further, the more sales a company is making on the internet, the more it will spend on training.

The higher spending on marketing capability development also reflects the rising importance of equipping staff with digital marketing skills. As shown in the image below, overall, spending on marketing knowledge and capability development has increased by a whopping 10.4% in one year, but even more so in the B2B Services sector.

Another notable finding is that companies with the highest sales revenue and levels of online sales invest more in marketing capability development. On the other hand, companies with the lowest revenues and levels of online sales favor outsourcing as they invest more heavily on marketing consulting services.

How to Spend Your Digital Marketing Budget on Different Strategies

Another factor that should be considered when planning how to spend your digital marketing budget is knowing which marketing strategies to prioritize.

Out of all the different strategies to market online, which one would you spend the most in?

This depends on a number of factors. Answering these questions will help you decide:

  • What are your goals and objectives for digital marketing? Do you want to promote brand awareness? If so, it might be good to focus on social media. This leads to the question:
  • What social media channels work best in reaching your target audience? If you’re a B2B, LinkedIn makes a lot of sense. If you’re targeting fashionable millennials, you’d want to be on Instagram.
  • What strategies worked best for you in the past? What didn’t work? You want to invest more on the strategies that work best and consider minimizing or completely dropping those that don’t.
  • Which digital marketing strategies are your competitors focusing on? If they’re focusing on that, it could mean two things: (1) it’s working very well, or (2) they’re missing something to make the other marketing strategies work. This could be an opportunity for you.

Looking at which strategies are most important for other marketers can also help you decide on how to spend yours.

Let’s take a look at this graph from a report by the Digital Marketing Institute:

As seen here, the top five important channels that marketers will heavily invest in by 2020 are mobile, online marketplace or aggregators, video, display, and email.

The implications of these findings are huge. Businesses across industries stand to benefit from the growing opportunities that mobile marketing gives.

Consider this:

Up to 70% of web traffic comes from a mobile device, including 75% of email opens in the US in 2017.

Further, 42% of marketers still see SEO as very important. Search engine marketing is still a top strategy for many marketers, with many marketers arguing that it has one of the highest ROI’s of all marketing strategies.

As mentioned earlier, search engine marketing is also attractive to small businesses as it’s a high ROI and easy-to-measure strategy.

If you’re still vague on how you should choose the channels to focus on, consider this graph:

As shown here, marketers prioritize channels that best reach their target audience, have been successful in the past, can be easily measured, and cost-effective.

Which Social Media Channels Should You Invest In?

As seen in the previous graph, both paid and organic social media are considered very important by many marketers. But when we say “social media,” it’s more than just Facebook.

Your company shouldn’t focus on Facebook just because everyone else is there. It should be based on your industry sector and your target audience because what works for a B2B company probably won’t work for a B2C.

For instance, here’s a graph showing the most preferred social media channels by B2B companies:

LinkedIn is the top most effective social channel for B2B companies, followed by Facebook (with a rather huge gap) and Twitter.

A word of caution though:

Not just because you think you’re in a “boring” industry doesn’t mean you can’t kill it on social media.

Novartis, a pharmaceutical company based in Switzerland, is an example of a B2B company that’s in an industry that many would consider “boring” but still managed to build a strong Instagram following.

This is the type of post that you’ll find on their feed:

This photo and its caption is something that Instagram users can relate to. It doesn’t always have to be about your business, but think of something that your followers can relate with and find value in.

For example, if you’re an insurance company offering insurance to businesses, your target audience would benefit from posts about entrepreneurship, industry trends, or productivity tips.

As for B2C companies, these are the top-ranked social media channels in terms of effectiveness in 2016, according to the Content Marketing Institute:

Facebook dominates the B2C industry, followed by Youtube, Twitter, and Instagram.

Again, these averages are a good starting point, but the key is to know your audience and where they spend their time in.

If you’d like to know more what type of audience is suitable for major social media channels, you can check out this article.

As we’ve discussed throughout the article, the best way to come up with your digital marketing budget is to know your company’s financial standing, your goals for digital marketing, and the best channels and strategies for achieving your goals.

If you need more help with your digital marketing budget or deciding which strategies to focus on, Marketing Ignite is available for a FREE consultation.

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