Know-How Exchange : Other

This varies from industry to industry. In Industrial wholesale distribution the percentage was very close to a half percent of the top line.

Dear Bob

This is an oft asked question on this forum and the short answer is “No, there is not a typical percentage” The correct answer is the percentage which fits your marketing model, not someone else’s. And it is certainly not an average from some selection of companies – random or not. Here’s why

Even if there was a published average, which there might be, somewhere, it probably wouldn’t apply to you. If you added up all the marketing budgets of all the firms in all the world (This is sounding like an extract from Casablanca!!) and then did the same with their turnovers, you could derive an average marketing spend expressed as a % of turnover for industry as a whole. But as it would encompass 50,000 standard industrial classifications, what the hell has it to do with your business.

OK, let’s say you did it for motor sales? What would that infer for you if it included manufacturers and distributors and unsuccessful American firms with huge TV advertising spends as well as successful Korean Manufacturers who rely purely on far-eastern direct mail and call centres?

Even if you reduced it to three companies in your market and one spent 1% and was profitable, one spent 11% and was profitable and the other spent 6% and was going down the toilet, would you automatically select the average (6%) as an ideal, given that you know that the third company is rubbish?

Randall, Kathy and others are correct in pushing for a high percentage spend as a goal and Steve it totally correct in his warning about low and diminishing percentages being a recipe for disaster, but in reality, the only correct percentage spend is the one which supports your sales plans and can itself be justified by showing an appropriate return over a 12 or 24 month period for the company.

Industry averages are useful in showing that your company is being, at least by comparison, parsimonious or spendthrift, but they only mean something in commercial terms when you look at them in conjunction with the profits and in conjunction with the strategy which brought that particular expenditure into being.

Do your sums and demonstrate that your own, particular, unique marketing spend, can or as seems likely, can’t support the sales and sales growth objectives of the company. If the maths and the projections don’t add up, you have a strong case for change.

From what you have written here and elsewhere, your company sounds like a basket case and I would strongly recommend a Christmas present in the form of a visit to your local friendly head-hunter. After all, if a guy can ask such appropriate and searching questions, come up with appropriate solutions, tactics and strategies and then be totally ignored, you are both talented and in the wrong employ! Get out.

Regards

Steve Alker
Unimax Solutions

I thought the calculation was a percentage of sales (projected sales) which is a standard 3-7%, so

$1,000,000 x (3%-7%) = $30,000 to $70,000 ad budget

i belive the budget should be flexible. it totaly depends on your product/service. infact marketing a service good is not only difficult but budgets could be very little to very high. like my org spends less than 1% on marketing (education group).
likewise the telecom industry(pakistan) is keen on spending a lot more than 7% figure, on average, they are spending 15-20%.
agreeing with most of them one should look at the sales revenue and also the increase in percentage in last 3 years sales, atleast. this will help you in planning the marketing budget as well. decrease in sales is also taken postively, and it should, a good example would be Paktel Telecom one of the first telcom companies in Pakistan. in the last 3 years they have had the lowest sales and the higest marketing budgets with in the industry to pump up and create a new driving force amongst its exisiting clients to maximise usage.
you must be in synergy with your strategic dept as well to where do they want to take this. It is flexible game, some times you dont spend at all and the results are just great. budget depends on marketing stratgey and goals not the other way around.
kamil

The standard calculation can get you to a starting point where you can tweek the numbers plus/minus as you feel is appropriate.

The standard calc just gives you a general starting point to begin. (see above).

This is getting silly. Normal for whom? By normal I guess that you mean average – I can’t see any other way of empirically defining normality. A survey of 300 of my clients indicates that they have a marketing spend of between 1% and 17% of turnover. Using a properly weighted average, their average spend would be 5.3%.

Does that make the rest abnormal? Or does that make them stupid? It just happens that 3 of the companies with a spend of between 5.1% and 5.6% (and there are only three) are in the bottom 5% of profitability expressed as a percentage of turnover, so what’s the big thing about being wise about industry averages?

The average IQ of the population is, by definition, 100. (If you believe in the measure) Does that somehow help you succeed in the marketplace if you consciously go out to hire only people of an average IQ?

What the range of percentages in marketing spend tell us is that there are as many different figures out there as there are strategies, markets, tactics, goals and egos. That there is some magic “Norm” is utterly irrelevant to the job of allocating the right spend or percentages spend for a company.

I’ve got to break off now; I’m feeling a bit hot. Its not that I’m feverish or that the thermostat is too high, it’s just that I’ve recently calculated that the average body temperature of all vertebrates is 22.7 Celsius. As I appear to be running at 37 degrees, I must be ill, regardless of what all those medical texts tell me. Woe is me. Or maybe I shouldn’t have included reptiles? Whoops, without them in the figures, I’m apparently running a chill – I can feel hypothermia setting in!

Best wishes


Steve Alker
Unimax Solutions

Steve Alker is right: this is getting absurd. Marketing spending as a percentage of sales is a totally irrelevant number. Do NOT provide that number to your management or anyone else, unless you want to demonstrate your lack of understanding of marketing.

Any number anyone gives is an average. There's a great answer from ASVP/ChrisB at a very similar question

hi there

some great posts by both Steve, micheal, kathy and randall.

let me give another angle to look at marketing budget.

you have mentioned that you are launching some new line extensions in 2007. how do you measure in which segment you are gonna launch the new variants?? the segment that has high attractiveness with low or high capability; those with low capability you build the business/brand, while with high capability you cash-in on the business/brand.

accordingly your marketing spending should be different for each of these 2 segments; a substantial budget for that brand/business you want to build, and moderate budget for cash-in brand/business.

for a brand/business in a segment that has low potential and capability, you dont spend much of marketing budget as you are gonna prune your business/brand in this segment.

for a brand/business in a segment that has low potential but high capability, you again spend a considerable amount as your marketing budget as you need to differentiate your brand/business from competition, to stand out of the crowd.

as you can see, your marketing budget should actually vary depending on your segment. although, as others said, it varies from industry to industry; ideally it should vary according to the segment in which the brand/business is operating and also as per Product Life Cycle.

hope this helps.

cheers!!

Ah, Dan

An intelligent use of averages! But it is still one which must be used with care, which I can assume that you do. Welcome to MarketingProfs, by the way. The friendliest place on the web to violently disagree with someone!

The care needed is illustrated by the following dilemma: If you were a management consultant and were hired by a software company which was spending 2.5% of turnover on marketing to generate a 10% profit on an on-target turnover, and you had access to a narrow industry based survey which indicated that the average spend was 9%, in a range of 6.4% to 15%, what would you advise this company to do? Apart, that is, from asking them to pay you up-front!

If increasing the marketing expenditure to industry norms doesn’t produce a pro-rata increase in turnover, you can say goodbye to your profitability. The first point to reflect on not to head for some useful sounding average, but to analyse why the company is as successful as it is in the way it is currently structured. Improvements might well be possible and they might well include upping the marketing spend, but only if you can prove that the desired results are likely to be consequential from your actions.

Then say that you are hired by a company with the same 2.5% marketing spend which is a profits basket-case. The industry average would automatically make you assume that spending 6 or 8 or 10% on marketing would surely result in some measurable improvement. Or would it? Might not the company simply have some intrinsic operational flaws in sales, or cost management, of crappy products and so on, such that you would just be chucking good money after bad, rather like most Governments do when they spend our tax money on our behalf?

So the trick is a deep analysis of all the aspects of the operation in order to see how much the marketing budget actually impacts turnover and the bottom line, and how much the bottom line is influenced by ineptitude, poor product, lousy sales management, bad buying and ego-ridden strategies. Despite being passionate (I hate that word in the modern context) about marketing, I’ve often told clients to stop wasting money on new marketing initiatives until they can firstly get them right and secondly handle the consequences, by, for instance, learning to sell things.

So, on balance, I still think that averages stink, but only on average! Nice point though.

Steve Alker
Unimax Solutions

I would add to what Steve said that the amount of marketing spending (absolute and percentage of sales) will depend most importantly on what the objectives are.

If you're milking a brand and it's a cash-cow, you might spend less. If you're trying to grow in a highly competitive market, you'll spend more. If the brand is a loss-leader of some kind, then you might even spend more than all of your profit (for that brand).

And the averages include brands with all kinds of objectives, so looking at averages -- even in the way Dan suggests -- is more likely to be misleading than not.

Of course, if you don't mind using the data to accomplish an objective without regard to the appropriateness, then why use an average? Use the minimum or maximum that will help prove your point.

I used to work voluntarily at a theatre which had an actor budget which was based on a percentage of the population we served, thus 30 actors was the right number. No more and no less. Ahh! The good old days of socialist government and union rules.

It made for some interesting productions with 6 Estragons, 6 Vladimirs, 6 Pozzos, 6 Messenger Boys and 6 Luckys in "Waiting for Godot", but with all the Actors having to do 3 parts, sometimes at the same moment in “The Duchess of Malfi”, but it was just right for some Marxist Rubbish by Steven Gooch.

Only hardly anyone came to see the latter clap-trap, so it played to empty houses. Can I assume that the management just got the percentage to use on the marketing budget wrong?

Steve Alker
Unimax Solutions