There are a lot of different ways that people will ask the question posed in the headline to this post.
What is your marketing ROI?
What is your marketing contribution?
How efficient is your marketing spend?
And depending on who you are, and what your company norms are, you may answer the question in a variety of ways. Some companies prefer to see marketing spend expressed in cost per customer acquisition terms. Others want to know how much revenue is generated for every dollar spent on marketing.
But one core metric that every marketer and business should know is how much money you’re spending on marketing relative to total revenue. It’s a metric that you are likely to see in most business courses, one that tells you how effective your marketing dollars are being spent.
How we calculate this number should be quite obvious, and not altogether difficult. Do you know what your total marketing spend is? Good. Do you know what your total revenue is? Also good.
Simply divide the total marketing dollars spent by the total revenue generated, and multiply it by 100 to express that number as a percentage. And there you have it.
Now that you have your percentage, you need to know what it means. Are you doing a good job or aren’t you?
The percentage that you’re looking at is the best way to determine the overall effectiveness of your marketing budget. If you are spending money in the right way, in your efforts to drive sales and grow the business, then that number will tell you. In the same way, if you are spending money inefficiently, it should tell you.
If the percentage you get when you do the calculation is 50%, that means that you are generating roughly $2 dollars for every dollar that you spend on marketing. You may think that sounds like a good deal, right? The problem is that marketing, although it may represent the highest cost center in the business, is not the only cost a company must account for.
Therefore, if marketing is generating $2 for every dollar spent, there is only $1 left over for finance, and customer service, and product development, etc.
So that leads one to ask, what percentage of revenue should you spend on marketing? Is my percentage high or low?
The target should vary from company to company and industry to industry. Some companies and some products will have lower costs than others, and therefore can dedicate a higher percentage of overall expenses to bringing in new customers. But margins matter, no matter what business you are in.
A baseline average across industries, according to most textbooks, is that you marketing expenses should not be higher than roughly one-third of total revenue. Aim for 30%.
Understanding how efficient your marketing is matters if you want to ensure sustainable growth. If you spend too much on marketing and don’t get enough revenue in return, you might lose money as you grow.
Calculate how much you are spending on marketing as a percent of total revenue and adjust your strategy accordingly.