As the owner of a marketing firm that specializes in growing manufacturing companies, I often get asked, “How much should my manufacturing firm spend on marketing?” My typical response is, “Well, it depends.” As you can imagine, this isn’t the answer most people are looking for. The challenge for many small- to middle-market industrial companies is that they have never budgeted for marketing. For them, the budget is zero. I often hear, “I don’t have a formal marketing budget, but if you can make me money, I will spend money to make money.” I always like a challenge, but I’m always left asking the same questions: “How much marketing budget is enough to garner the results the manufacturer demands and how much is too much?” It’s a chicken or egg scenario. One that plays out every day at my company.
To help manufacturers develop a realistic budget, we ask five primary questions.
- What is the value of all of the opportunities you’ve lost in the last year because your competition is better positioned in the market? $_______________
- If your industrial firm had a strong marketing and sales infrastructure, what kind of growth would you expect to see? How does this translate into increased revenue? $______________
- How much revenue did your business miss out on over the last year because you lost quotes due to having a weak value proposition? (i.e., you lost to price, quality, indecision or timing)? $__________________
- How much does a new qualified salesperson cost to your business, including benefits, technology, expenses, etc.? $________________
- How far behind are your goals because of weak sales and marketing? $________________
After answering these questions, many manufacturers will find that lost opportunities are in the millions. So, the question of “How much should manufacturing firms be spending on marketing?” should really be, “What is the value that marketing can have on a manufacturing business?” The five questions above will help you to better understand this potential value. Now all you need to do is determine if the marketing investment (not an expense) is worth the value.
Let’s say you complete the five questions above and find your total losses were $3.5 million last year—not an uncommon result for small- to middle-market manufacturing firms with annual revenues between $10 and $50 million. The reason I say “Well, it all depends” is because each manufacturer places a different value on attaining the lost opportunities. Recent studies have shown that the average profit margin for manufacturing firms is 6.5%. If this is an accurate margin for your company, it equates to a $227,500 profit on $3.5 million. Understanding that much of this business should be repeat customer sales, the manufacturer has to determine how much to spend on marketing based on the calculations and potential return on investment (ROI).
An Alternative View
To look at this in a completely different way, the Wall Street Journal published an article based on a study by Deloitte. This study showed that manufacturers spend, on average, 8% of their total gross revenue on marketing. This 8% is spent on direct marketing costs, not including marketing salaries and staff. Personally, I feel this is a little high, but I do believe it’s more on track with what a manufacturer should be spending on marketing as it relates to revenue. The reason I prefer to look at marketing as a percentage of revenue is because not all marketing is measurable to a specific ROI. I can hear the manufacturing business owner now…“What do you mean by not measurable? If I buy nuts and bolts, I get nuts and bolts that I can use to manufacture my products and I can track that cost. I don’t spend money on intangibles.” I hear this all the time, but in every one of these situations I can point to a competitor of that same manufacturer that is winning all of the quotes and they almost always have very strong marketing.
Yet Another View
So if you’re not buying the value calculation formula and the percentage of revenues doesn’t float your boat, then here’s another way of looking at your marketing budget. You get what you spend. Period. If you budget $60,000 on marketing, you are effectively getting the equivalent of one marketing staff member with approximately seven years of experience. I doubt one person or the equivalent of one person can drive real sales and revenue growth. If you are spending less, then you can do the math. That intern is not going to get the results you are demanding!
So the question remains: “How much is just right?” If you want to win new business you have to be better than the competition at telling your story. You have to build trust with that prospect before they ever meet you or talk with your sales team. Those that are more aggressive tend to scale more quickly.
So how much should you be spending on marketing? Like I said, it all depends.