The Art of the WordPress Startup: Part 4

Startup Marketing Budgets

This post is part 4 of a series on how to launch your startup on WordPress. Last time I talked in-depth about how to find the optimal price for your product, and this week we’ll focus on the optimal amount to spend on marketing.

How much should my WordPress startup spend on marketing?

I often get asked this question because I’m the director of sales/marketing here at Pagely® and have co-founded a few companies that have done between hundreds of thousands and millions in annual revenue (that doesn’t make me too cool for school, it just means there’s a chance I know what I’m talking about). And surprisingly, it’s not just first time founders; even seasoned entrepreneurs still don’t have a gauge for what their competitors and those in their industry are spending, or even what they should be allocating to help promote their brand. Many are jaded and think that “advertising doesn’t work”, “advertising is for big companies with big budgets”, or perhaps aren’t patient enough to allow the proper time for the ROI to kick in.

Do you think GEICO (their name really is all caps, that’s not for emphasis) saw an immediate return when they started running those TV ads? Do people really whip out their laptop or tablet and start getting car insurance quotes while watching TV? Maybe now more than before due to the second screen trend, but most people see the commercial and continue on about their day. But what’s the first brand that comes to mind when you think of car insurance? If you’re like me, it’s GEICO. So they’ve got great “mind share” and when people like me do go to get a car insurance quote (often when we’re not watching TV), we typically check GEICO and maybe even check them first. Did you even know their acronym stands for Government Employees Insurance Company or that Warren Buffet’s Berkshire Hathaway fully owns them? Maybe not. But they’ve pounded it into your head that if you want to save 15% on car insurance, you should check them out. ***In a separate piece down the line in this series I’ll talk about branding efforts vs direct response, but for now let’s stay focused on how much to spend on marketing. Each topic warrants its own article.

Before we begin, one final anti-marketing comment you’ve likely heard blowhards say is something along the lines of “just make a great product like Apple, and you won’t have to spend anything on marketing”. That is a pile of nonsense. How do I know? Because despite Apple making great products (even if you use Android and hate Apple, you can at least admit they have a cult-like following) they still spend a ton of money on marketing. During fiscal 2013 they spent a whopping $1.1 billion on advertising. Wait a second, did you say billion with a B? Yep, and that puts them among the top spenders overall. Remember all those TV commercials and billboards you saw last year? Not cheap.

Okay, now that we’ve established that even those companies with cult-like followings spend a decent chunk of cash on marketing, let’s dive a little deeper. The first thing to understand is that you shouldn’t be asking “what amount”, but rather “what percentage”. First of all, your company is hopefully growing if you’re thinking about ramping up marketing spend, so using a static amount is suboptimal. Second, it’s much easier to compare and benchmark yourself against other companies both in your specific industry and in business in general when you talk in percentages.

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The Big Boys

It’s important to understand what large companies spend on marketing for a few reasons. First, you might be competing with them directly or indirectly, so it gives you a snapshot of your competition and comprises one aspect of competitive research. Second, since data on your competitors that are startups is often hard to get (e.g. you likely aren’t publishing what you spend on marketing), knowing the percentage that large companies spend will at least give you some idea in the event you can’t dig up much on the startups in your vertical. Remember, public companies often disclose their exact revenue and ad budgets, so you’re getting the data straight from the source. Finally, if you hope to grow to be as large as them someday, you’ll know what you’re in for should you become a conglomecorp as well.

What’s the best data source to get a pulse on what big companies are spending as a percentage of revenue? The CMO Survey of course. It’s run by a professor at Duke University which means it’s probably more accurate than what you’ve read on forums and heard being spread around your co-working space. We’re talking reliable sources, accurate analysis, and imagine this… fact checking!

So what did the latest CMO Survey reveal? The latest edition was reported in August 2013 and found that the mean (average) marketing budget as a percentage of revenue/sales was 7.8%. When broken down by industry, we get even more interesting findings.

  • Consumer Packaged Goods (think P&G) = 8.7%
  • Communications Media = 10.8%
  • Mining & Construction = 2%
  • Transportation = 6.1%
  • Energy = 10%
  • Manufacturing = 4.5%
  • Retail/Wholesale = 8.3%
  • Tech/Software = 12.5%
  • Banking/Finance/Insurance = 9.9%
  • Consumer Services = 5.3%
  • Service Consulting = 5.4%
  • Healthcare & Pharmaceuticals = 7.8%

I’ve emphasized the “tech/software” and “service consulting” categories above since they’re probably the most applicable to most of you launching a startup on top of WordPress. Notice that even consulting businesses which tend to rely on referrals still spend more than 5% of revenue, while even more surprising tech/software firms are spending the most at 12.5%. So this is one range of figures to keep in mind, roughly 5-12% (assuming none of you are starting a mining operation).

Startups & Smaller Companies

The SBA put out an article in 2012 that gave the following guidelines for small businesses:

  • 2-3% for run-rate marketing
  • 3-5% for startup marketing

They note that the above should be adjusted for the industry your business is in, its current size, and phase of growth. Remember that industry data we dug up above? Use those metrics to adjust your number upward or downward. They go on to say…

“As a general rule, small businesses with revenues less than $5 million should allocate 7-8 percent of their revenues to marketing. This budget should be split between 1) brand development costs (which includes all the channels you use to promote your brand such as your website, blogs, sales collateral, etc.), and 2) the costs of promoting your business (campaigns, advertising, events, etc.). This percentage also assumes you have margins in the range of 10-12 percent (after you’ve covered your other expenses, including marketing).”

Ok, so the SBA is telling us a range of 2-3% if we’re established and as high as 7-8% for those with revenue less than $5MM. Since the SBA might not exactly be keeping their finger on the pulse of the true “startup” scene, we should also consider one other data point, Sean Ellis. Sean (cool name) is probably the best known pure marketer in the startup scene. A couple years back he did a great post talking about product vs. marketing spend and when to make the adjustment of funneling more cash into marketing (hint: once your product rocks). Towards the end of the piece he talks about how he’s seen companies split spend as high as 80% marketing / 20% product in cases where the product was dialed in and the marketing ROI was positive.

Final Thoughts:

As with anything else, it’s hard to throw out a good exact magical number as my recommendation for your startup, because it’s impossible without knowing your industry, margins, and competitive landscape among other things. However, the above guidelines are likely helpful in setting what % of revenue it is you feel comfortable with.

This piece focused on advertising/marketing spend as a % of revenue because that’s a question that I often get asked. Before closing, it’s important to point out that the most important thing is to first determine what the lifetime value of your customer is on average (and by customer type if you have multiple types), and then figure out what your cost to acquire them is. If you can get things dialed in where for every $1 you spend on advertising/marketing you’re getting greater than $1 in return, then you should scale up those initiatives as high as you possibly can. Now that I think about it, that topic warrants its own article as well, stay tuned.

Full Series — Click here to see all articles in this series.