03 Jul Jon Cartu Claims: Cost of Marketing Benchmarks: What Should Agencies Spend on…
How much should agencies spend on their own self-marketing? It depends…
You can calculate cost of marketing as a percentage of revenue—between 7% and 20% of revenue, including labor costs. Yet for many agencies, headcount is an easier initial metric—between 0.5 and 5+ FTE (full-time equivalent) for an independent agency under 100 employees.
OK—but what’s the right number for your agency?
Today we’ll look at agency industry benchmarks for self-marketing spend—including how to choose between a percentage of revenue versus FTE count—and what KPI targets match your unique Values, Goals, and Resources (VGR). I cover how to prioritize your marketing efforts here.
Option 1: Cost of Marketing, as a Percentage of Revenue
In short, I recommend you spend 7-20% of your agency’s revenue on self-marketing. But there are all kinds of ranges to consider; to frame things, I’ll share two general benchmarks, and then my agency-specific benchmarks.
CMO Survey: ~8-12% of Revenue
- This represents a COVID-related surge; in past years, the figure ranged from 7.9% to 9.3% of revenue.
- B2B firms spend less on marketing than B2C firms… but in both categories, services-based companies spend a higher percentage of revenue on marketing versus product-based companies.
- As of the June 2020 survey, B2B Services firms spent 12% of revenue on marketing.
Yet nearly three-quarters of CMO Survey respondents had 100+ employees—so these results skewed toward [relatively] larger companies than most independent agencies. What about small[er] businesses, like yours?
SBA: 7-8% of Revenue
The U.S. Small Business Administration (SBA) recommends that companies under $5 million in revenue spend 7-8% of revenue on marketing. Based on that benchmark, for example:
- A company with $500,000 in revenue would spend $35,000 to $40,000 on marketing.
- A company with $1 million in revenue would spend $70,000 to $80,000 on marketing.
- A company with $4 million in revenue would spend $280,000 to $320,000 on marketing.
Those percentages are theoretically helpful—but the first example seems too low… and the second is pushing it, too.
What about agencies specifically, where their largest expense is labor—and where any employee might potentially be contributing to the agency’s marketing efforts? That’s where specialization comes in handy…
Karl’s Agency-Specific Benchmarks: 7% to 20%
When it comes to agency-specific benchmarks for self-marketing as a percentage of revenue, here’s what I recommend for independent agencies like yours:
- Less than 5% of revenue: Dangerously low
- 7-10% of revenue: Moderate investment
- 20%+ of revenue: Hyper-growth
Of course, that’s all relative, including how your agency allocates costs and how fast you’re trying to grow—more on that shortly. An early-stage agency might need to spend more—both because the expenses are high relative to their current revenue, and because they don’t have the momentum of years of marketing activities and name recognition.
Agencies tend to be inconsistent about tracking their own marketing costs. They likely wouldn’t advise their clients to do the same. #ShoeMakersKids
Be Sure to Include Both Labor and Non-Labor Costs
Your cost of marketing should include labor and non-labor expenses. Here’s a high-level summary of what goes where:
- Labor costs for marketing are pro-rated to the percentage of time that people spend on marketing. If you have freelancers who regularly contribute to your self-marketing, I’d include them (pro-rated to exclude their billable-to-your-clients time) in your labor costs.
- Non-labor costs for marketing including advertising (media) to promote the agency itself, promotional products, software subscriptions (pro-rated to exclude expenses re-billed to clients), and fees to hire other agencies to do your own marketing.
Want to find your agency’s current Cost of Marketing, as a percentage of revenue (Option 1)? Read on for my step-by-step tutorial, if you choose the “by revenue percentage” approach.
[TUTORIAL] How to Calculate Marketing as a Percentage of Revenue
Follow these steps to calculate your agency’s current Cost of Marketing, as a percentage of revenue. Note that you’ll want run the calculations a few ways—for instance, looking at last year, YTD, and the past 12 months—to smooth out seasonality.
- Pull up your accounting software, and the list of categories to include and exclude (from above). Remember, you want labor and non-labor expenses.
- Run a Profit & Loss (P&L) report, which will list revenue and expenses by various categories. As a starting point, consider looking at the last fiscal year, the current year to date (YTD), and the past 12 months.
- Identify your total revenue for the period. Depending on your software and how your accountant set up the Chart of Accounts, this might be called Total Sales, Total Income, Revenues, or Gross Profit. In QuickBooks, I use Gross Profit. Why? Because it subtracts Cost of Goods Sold (COGS), including “pass-through expenses” like media buys and printing; aside from markup, this is revenue you don’t hold onto.
- Identify your total marketing expenses for the period. Use the categories above to guide what to include and exclude. You may need to dig into specific employees’ compensation, and may need to pro-rate it. You may also need to run another report to fully calculate your own compensation, if you take some in the form of an owner’s “draw” (since that doesn’t appear on the P&L).
- Divide the marketing-related expenses by the total revenue. This is your sales expense as a percentage of sales—and you can compare it to the 3-20% benchmark.
- Repeat the process for other time periods (e.g., last year, YTD, past 12 months), to ensure you aren’t over- or under-counting things. You might also compare each percentage to the prior…