Ask the Experts | What Should I Spend on Marketing?
Question: What percentage of my total revenue should be spent on marketing?
Gary Elekes:There’s no one right answer to that. The percentage of marketing expenses is going to rely, and be linked heavily, to the goals and the growth patterns that the company desires. So, we always like starting off with an operating plan. What am I trying to accomplish, for example, in the year 2018? What do I want that to look like in the year 2021? And even in our own discussions, we project 10 years out. We use Jim Collins’s metaphor – he trademarked it – it’s called “B-HAG”: big, hairy, audacious goal. It’s a 10-year goal. So if you say, “Well, I want to be a $1 million company in 10 years, or I want to be a $100 million company in 10 years.” It’s that big goal.
And what that does is it frames the conversation about: Where am I now, and where do I want to be in one year, three years, ten years? And that’s a discussion that you can have by yourself, as a small company, as a company owner. Or if you have a larger company, and you have a management team, that’s the conversation that everybody should have. The beginning process of what marketing costs are link back to that conversation. So there’s a gap that’s created. I’ll just use an arbitrary example. If I’m a million-dollar company today and in 2018 I’d like to grow to $1.5 million, that’s basically a 50% growth pattern; $500,000 of growth. So I need to figure out how am I going to get that? The next layer underneath of that become the financial plan. The financial plan is always first, the marketing and sales plan is second, and it’s subservient to the financial plan. Because if we spend money and we don’t make money, we will not survive in business. So the financial plan comes first. So we have to set up the idea of saying well, if we’re going to grow this business $500,000, how do I access that ability?
So, many different ways. I can go to the marketplace and use media, such as digital media, or I can use traditional media – radio, TV, direct mail – those would be the traditionals. Digital would be things like websites, pay-per-click, AdWords, social media, reputation management, Angie’s List, Home Advisor, Google Home Services, etc. And there’s tons of videos on the website [egia.org] – there’s probably 14 or 15 videos on the digital side, and there’s at least 30 videos on the marketing side – probably 10 of them are on the media, just talking about each individual medium at this point. So that conversation is just determining, Well, how much do I want to spend there?
There’s three different kinds of marketing that we have to identify inside of that discussion. The first one then is external – advertising, you know, the media. Being able to go out and scream to the marketplace, “I’m here, these are my products and services, buy something from me!” That’s effective, but it’s usually the most expensive version of our marketing expense. It’s the one everyone knows about and everyone thinks about, because we get inundated with the ads on TV and the media that we tend to get exposed to in our daily lives.
The second type of marketing though, that’s probably more important to the actual small contractor, is the internal marketing problem. Those are the battles for the employees’ minds and willingness to execute the actual strategy that the company has – like selling a service agreement to a client who might need a service agreement. Or if we have technician opportunities and we don’t transact – the technician had the opportunity, we created that opportunity as a business, but we didn’t execute, we didn’t take advantage – oftentimes that’s a mindset issues. So I would encourage you to go through Wally’s mindset training and mindset discussion. Because having people aligned and understanding the company’s purpose and the company’s marketing philosophy about what’s necessary is absolutely crucial to reducing the amount of money the company is spending in media. So if we’re spending over here in media that’s great, but we’d rather grow without having to do that, because we get to keep the cash flow.
And then the third component is operational marketing, which is the business processes that are inside of a company affect how well or poorly customers refer us and interface with our company – and that’s called brand experience. And there are a litany of examples of how poorly companies set up their business practices, to the point where it’s aggravating or it’s negative in the experience to a consumer. And so I’m not going to give you a referral or go on Facebook and say “You should buy from ABC Heating, Cooling & Plumbing because they’re the most fantastic business ever; I love these guys.” And then maybe put a review out there through RecommendMe or one of the review agencies.
So those are low-cost process that you should look at and say “Well, how do I build operating practices, brand experience practices, that make great experiences for my customers?” You know, one bad experience, people tell 24 people, one good experience they tend to tell between 8 and 11. So it’s a numbers game that’s working against you if your practices are bad.
So those are the three fundamental core areas that I would take the goal-setting process through first. How do I want to grow my business? Do I have internal opportunities, do I have operating brand practice opportunities? Let’s fix those first. A business owner should spend at least 50% of their energy and time on those two areas – that’s tech training, that’s customer service training, that’s grabbing a guy like Brigham Dickinson at Power Selling Pros and getting him in to your customer service dispatch function and help your conversions become better. I don’t want to quote Brigham, but I think he says they can guarantee at least 70% conversation rates. So if you’re at 60 and you need to get to 70, you don’t need to spend external media money, you need to get to 70%, 75% or 80% — book more calls that you’re already getting. And then I think you want referrals, you want service agreements, you want your existing customer base being raving advocates – lunatics! – about recommending you as a reputation-based company for the type of business that you are.
When you have those two things working in your favor first, and you spent 50% of your leadership time pressing on those issues to get them right, what you’ve done is created a backbone of a company that can then grow through the media side. So most of my consulting work is done generally in the first two areas that I describe. And before I want to spend any marketing money, externally on the media side, I always have the goals and we solve those first two layer so marketing. And once we have those seamlessly working and we’re basically printing money in the company at that point, then it’s worthwhile to spend money to grow.
So the answer is, if I want to grow somewhere in the area of 12% to 15% a year, a marketing budget to replace my customers – they’re going to move, die and/or decide they don’t want to patronize me – is somewhere around 3 to 5% of your total gross revenues. That’s a legitimate number to start a budgeting conversation.
If I want to grow 20%, I’m probably going to have to spend more money to seek customers who aren’t currently doing business with me. Typically we’ll see a 6% to 8% marketing expense involved in that type of budgeting process. And if you want to grow more than 20% — maybe you want to double your revenue, or maybe you want to grow 50%, like we said earlier, you want to go from $1 million to $1.5 million – once I know out of that $500,000 growth, how much of that is coming from my existing customer base (my service agreements, my opportunities that I already have), then I may have to spend as much as 9% or more. I’ve seen companies spending 18% of their revenues on marketing expense, but I’d also like to suggest that very few of those companies were profitable. They were growing very quickly, but they weren’t making any profit. So I’m not sure what you’re interest is, but if I’m a company that’s growing at 50% but I’m not making any money, that’s not necessarily attractive to me and my goal-setting process; that might be attractive to you. So the goals begin to frame that conversation.
So I always like to start with the first two: operating processes/operation marketing, brand experience, internal marketing (how the employees and team members are aligned and functioning and we’re able to print money and our pricing is correct and all is good), and 3 % to 5% is the first conversation. If you want to grow more and your goals and your business plan set up for that, sure you can spend more money, but you have to know that if you spend that money, it needs to return cash flow and capital back to the business. IF it’s not returning cash flow and capital back to the business, it doesn’t seem logical to me that you would risk that. It would be better served putting that towards the first two areas.