How much should you spend on new business?

  

 

What should advertising agencies spend on their business development activities? I say more than you are! It is a topic of great debate among agencies and all businesses alike. Apple spends 7% of its revenue on sales and marketing, Tempur Sealy spends 15%, Oracle spends 20%, and Salesforce spends a whopping 56%. For B2B companies like yours, the simple answer is 6%. But it’s never simple.

 

There is a variety of data to help understand what businesses are spending on average by size and industry, but data specific to ad agencies is hard to find. If you have a source, please let us all know. I’ve talked to agencies and consultants about this. One agency spends only 1.5%, and another spends 30%. Both have impressive growth but in different ways and for different reasons. What is the right number for you?

 

According to an AMA and Duke University study, 10% is the average for B2B. Does that mean 10% is the right number for you? Not necessarily. There are many factors to consider however, numbers compiled from other industries provide reasonable averages for agencies to benchmark their practices.

 

In this post by Vital, they provide a lengthy review of key marketer spending percentages.

According to a Gartner Research study, “companies spent on average 10.2% of their annual revenue on overall marketing, with 50% of companies planning to increase to an average of 10.4%.”

 

Businesses with less than $25 million in revenue spent an average of 11% on marketing while those with $25-$99 million spent an average of 9% on marketing. While the 10% number may be right for some businesses, it is definitely not a one size fits all figure.

 

According to research in a post by Ed Marsh at Business2community.com:

• Inc’s article on budgeting for ’14 marketing notes that according to IDC the weighted marketing spend (as % of revenue) is 6.4%.
• Some marketing agencies angling for bigger contracts will suggest that B2B companies should spend up to 15%
• The SBA suggests that companies with less than $5M in revenue should normally spend 7-8%

 

What do agencies do with their 6%, 10%, or 15% business development budget? That is another not so simple question. Agencies vary greatly on this subject as well. No surprise. Some put a big chunk toward cold calling resources. Others spend more on conferences and networking. Some tip the scale on pitch-related costs while others spend disproportionately on lead generation.

 

Your specific circumstances, accounting methodology, and growth strategy will shape your budgeting choices. If your revenue is $1 million and your business development budget is 6%, you’ll have $60K to work with. Likewise, $5 million in revenue means a conservative $300K and $10 million in revenue means $600K.

 

If your agency overhead is top-heavy, your staff utilization is low, or you carry a lot of debt you are probably not going to be able to invest aggressively in your growth. If you run a lean organization, you probably have more flexibility to invest the industry averages. Regardless of the amount, it must generate a favorable ROI? The information I’ve been able to gather suggests a 1.5 – 3% ROI when it's all said and done. Are you spending more or less and what is your ROI?

 

Whatever your percentage is, if you want to get the most from your new business investment, I can show you how. All it takes is an initial investment in time to talk about your goals and how I can help.

 

Let's get more clients

If you'd like help turning your new business budget into a competitive advantage, let's talk. I am always open to discussing your business development challenges. If you like this post, sign up for my new business newsletter. Let's connect on LinkedIn to network, share resources, new ideas, or talk about the latest ad agency business development news. #LetsGrow!

Comments

[Moksha media]

good and informative

[Sandra Michael]

Good information it will definitely help the beginners and new entrants in the business. Worthy sharing. Thanks

[Rudy Harper]

Hi John,
You are following me as deeplyroasted ,a website which will be devoted to old school and Italian style coffee roasting, a curating effort which is backed by a friend of mine who sells the worlds best selling aficionado commercial espresso machine . Probably 80% of his cutomers worldwide are what as known as "third wave" roasters and retail stores. Third wave is not my thing. They have their place but it is an outcropping that arrived simultaneously with indie rock and the IPhone and only represents a small segment of the overall coffee market. It is ,however,the noisiest segment.
The second wave produces way more coffee internationally and the roasters in that world generally have better infrastructure in place than do the third wavers. The third wave doesn't have much of a handle on wholesale, for instance.Really good marketing attached to the second wave would have immediate results. You can easily leverage solid infrastructure. So,I am going after the luxury market ,the folks who still drink Peets and {shudder] Starbucks.

A branding agency here was introduced by me to one of the best candidates for a marketing boost. His sales are in 8 major cities to large hotels, he has one of the best roasters in the business and so , talks are underway and it might work.

My second job, also as a freelancer, is that I rep my son, who is a video director. He is repped by two agencies in London and Paris. I look for jobs here and elsewhere in the US. Seattle is transitioning quickly from a small market city to a big market city. The ad agencies here run the gamut from not so great to really great. I call all of them. What strikes me is how many of them have not bothered to position themselves. Some of them have hideous websites and the video samples on them look like 40 year olds are trying to be cool... lots of the usual fast cuts,imitating music videos but doing a bad job of it.

Here is where I want your take on something. We have gone direct to companies who either don't have an agency or have had us bypass their agency. This means we have to do some of the work upfront that agencies do, so we are thinking of going with it and figuring out how to charge for the non camera stuff. So far we have done some coffee clients , a large general contractor in Seattle and a pretty good size paint manufacturer in Portland [their agency is awful] .

Don't get me wrong...we are willing to work with agencies but they seem to move slow and not return calls. Nik has worked with several agencies in Europe including OgilvyMather and he has liked it. But we want to work a lot. What o you think of us being a hybrid that does some of the agency stuff and all of the film stuff.
Thank you and my apologies for being so long winded.
Rudy