What Percentage of Gross Revenue Should Be Used for Marketing & Advertising? by George Boykin

What Percentage of Gross Revenue Should Be Used for Marketing & Advertising? by George Boykin

Setting the marketing and advertising budget is a daunting challenge for many small-business owners because of the many ways to approach the task. Percentage of gross revenue is one of the more favored methods of budgeting because it allows your spending to fluctuate as your revenue does. In the real world, however, marketing and advertising budgets vary widely based on your industry, competition, profit margins and a host of other considerations.

Tip

  • While percentage spends vary widely, the SBA recommends that small businesses allocate 7 to 8 percent of their gross revenue for marketing and advertising.

Marketing by Percentages

The U.S. Small Business Administration recommends spending 7 to 8 percent of your gross revenue for marketing and advertising if you're doing less than $5 million a year in sales and your net profit margin - after all expenses - is in the 10 percent to 12 percent range.

Some marketing experts advise that start-up and small businesses usually allocate between 2 and 3 percent of revenue for marketing and advertising, and up to 20 percent if you're in a competitive industry. Still other marketing experts counsel a range between 1 percent and 10 percent, and even more depending on how long you've been in business, competitive activity and what you can afford.

It's apparent from these differing opinions that the percentage of gross revenue for marketing and advertising depends mainly on whom you ask. They're probably all correct if you know their assumptions.


Real-World Research Revelations 

A 2016 survey of 168 Chief Marketing Officers revealed that marketing budgets account for as much as 40 percent of a firm's budget, with a median of 10 percent of the overall budget and a mean average of 12 percent. When shown as a percentage of overall revenue, the mean was 8 percent and the median was 5 percent.


Spending Variables 

There's a limit to how much you can afford to spend regardless of what others are spending. Let affordability guide your spending. Then, recognize that certain internal and external factors may cause your spending to fluctuate. Starting a business or introducing a new product requires more spending than spending on an on-going business. Conversely, you may want to reduce marketing spending while you activate your exit strategy if your business is in its twilight years.

If you're selling high-ticket, high-margin goods or services, you can afford to spend more on marketing. Likewise, if the competition is giving you a fit, you may have no choice but to increase your marketing spending.


Marketing Drives Revenue 

Marketing typically drives revenue rather than the reverse in most successful businesses. Moreover, marketing and advertising spending in most successful businesses is task- or project-oriented. Task-oriented marketing requires a marketing plan, something most marketing experts strongly recommend. The percentage-of-gross-revenue calculation is a useful ballpark gauge of spending parameters. But, you need to be flexible depending on the requirements of your marketing plan. You may be able to obtain specific marketing as a percentage of gross revenue figures for your industry from your industry trade association.

References (4)

  • SBA.gov: How to Set a Marketing Budget that Fits your Business Goals and Provides a High Return on Investment

  • ClarityQuest: Setting your Marketing Budget

  • Inc.: How to Build Your Marketing Budget

  • CMO Survey: CMO Survey Report: Top Line Results

About the Author

George Boykin started writing in 2009 after retiring from a career in marketing management spanning 35 years, including several years as CMO for two consumer products national advertisers and as VP for an AAAA consumer products advertising agency. Boykin mainly writes about advertising and marketing for SMBs.
Boykin, George. (2019, March 01). What Percentage of Gross Revenue Should Be Used for Marketing & Advertising? Small Business - Chron.com. Retrieved from http://smallbusiness.chron.com/percentage-gross-revenue-should-used-marketing-advertising-55928.html

Terrence Attridge