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02 January 2023

How to Kill a Business: What are the Marketing and Advertising Costs for Startup

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Traditionally, marketing textbooks recommend start-ups to direct 15-20% of annual income (planned) in the first five years to promote the business and then gradually lower the bar to 5%. But, as world practice shows, for modern realities this is very bad advice. Further, we will show with real examples why the 15/5 rule no longer works and how much marketing and advertising for business startup websites actually costs now.

Just note that now startups should spend on marketing about 35% of annual income at the start and from 11 to 25% thereafter (some companies spend up to 50%). Considering that the average seed investment over the past ten years has grown from 250 to 750 thousand dollars, it means that now they spend $ 262 thousand on marketing, most of which are the costs associated with entering the market or launching a new product or service.

Calculation of the marketing budget

The marketing budget usually includes the costs of researching the market and the target audience, ensuring the competitiveness of the product, informing the client about a product or service (advertising, SEO, SMM, promotions, participation in exhibitions, etc.), creating a brand image, organizing distribution of goods and sales network. All such events should be included in the marketing budget.

There are two types of budgets: the launch of the product and annual. The first document shows the variable costs associated with the launch of a new product or service on the market, the second shows the constant marketing costs for the year. It was previously believed that both the first and second budgets will gradually decrease due to the automation of digital marketing and the expansion of the Internet audience.

Marketing Budget for Product Launch

But, as noted in the Elad Gil essay «End of Cycle?», marketing new projects is now more expensive than in the early 2010s, despite the spread and cost of various technological solutions that simplify the work of marketers, marketers, copywriters, designers and other specialists.

Now, startups have to spend up to 35% of annual revenues on marketing and advertising (earlier, less than 20%), which is due to the following six factors:

# 1. Platform Consolidation. The duopoly of Google / Apple’s mobile ecosystems is becoming more concentrated, closed, and more saturated, making these mobile ecosystems harder to penetrate. To overcome this difficulty, companies increase advertising budgets and improve ways of promotion, so only those who are willing to spend more and more survive.

The most popular mobile apps in the world are mostly Facebook property. Whereas Google processes up to 95% of searches. Source of the image

Outside of mobile platforms, there are more, but not many, players: Amazon, Apple, Facebook, and Google. And here the same problems, plus you also need to deal with:

  1. Aggressive policies of corporations that either buy or “kill” competitors. How Amazon killed and Facebook killed Onavo.

  2. Google innovations, such as the BERT algorithm and snippets, which greatly complicate the promotion of sites in this search engine, which means that they make marketing and advertising more expensive.

  3. Distribution of "big data". If you do not have them, you need to either collect them or buy them. Both options require money.

# 2. Paid Channel Competition. Since the promotion of organic methods is becoming more complicated, many startups are switching to paid advertising. As a result, competition is growing here, which complicates marketing and, again, increases its value. Moreover, both in terms of the average cost per impression or click, and in terms of creating advertising (copyright, design).

The average cost of paid advertising on Facebook. Source of the image

# 3. Banner blindness and ad blockers. In addition to the fact that we are seeing an increasing concentration of digital ecosystems and increased competition among advertisers, there is also a noticeable decrease in the effectiveness of marketing channels due to the spread and intensification of “banner blindness” in referral programs and viral campaigns. How banner blindness works can be seen in the following image:

Heatmaps from eye-tracking studies, where the heatmap displays the reader’s attention and the green frames show ads. Source of the image

Another important factor that reduces the effectiveness of online advertising is applications and add-ons to block ads. Ten years ago, several percent of users knew about them, now 25%. And their popularity continues to grow. In fact, such programs moved to the Must Have section, so Google Chrome, Mozilla Firefox, Apple Safari, Opera and other popular browsers added this feature to their systems.

Distribution of ad blockers in the United States from 2014 to 2021. Source of the image

# 4. Availability of good marketing tools. It was assumed that this factor will reduce the cost of advertising, but, as it turned out, simplicity and cheapness leveled the field in this market. That is, everyone began to use high-quality tools (both marketers, businessmen, and bloggers), and since everyone uses them, it means that the effect of them is leveled. Moreover, automation of routine processes freed up resources that everyone decided to spend again on advertising.

# 5. Smarter and faster competitors. Previously, startups could count on their competitors to be big, stupid, and slow. This will not happen again, as we have all become smarter and faster, especially your competitors. Now, large players create special units that monitor the market, looking for potential competitors to buy, copy or "kill".

# 6. The market gets gradually saturated. Ten years ago, startups mainly competed with the boredom of people, now they are forced to compete with Google, Amazon, Facebook, Instagram, YouTube, Netflix, PayPal, Uber and other familiar applications, services and entertainment. There is less and less free space, and therefore companies stop playing games with a non-zero sum, where everyone wins, and start playing games with a zero sum, where the winner receives all.

Annual marketing budget

As noted above, most books and manuals recommend that established companies spend about 5% of revenue on marketing. However, if we study the data of The CMO Survey, we will see that successful companies usually spend more on marketing: from 6 to 9%. Moreover, in some industries this percentage is much higher.

Dynamics of marketing expenses over the past 10 years. Source of the image

Gartner studies show slightly larger numbers - an average of 11.2% in 2018 and at least 10% in the previous 5 years. At the same time, the Gartner report, like The CMO Survey, shows a large spread in the share of marketing and advertising expenses depending on the business sphere.

Dynamics of marketing expenses over the past 5 years. Source of the image

If you are interested in specific figures by industry, then this information is best reflected in the Marketing Charts report (more sample and number of industries). Thus, according to it, retail trade - 22%, car theaters - 12.6% and the financial sector - 12.2% spend the most on promotion. Medicine and pharmaceuticals spend the least on advertising - 2.6%.

Business spending on marketing by industry in 2018. Source of the image

But these are average indicators. If we examine the financial statements of individual companies, we can see that many companies, especially unicorn companies in the IT sector, spend much more. So, SaaS companies like Bottomline Technologies, MindBody, Salesforce, and Tableau usually give out more than 20%:

  1. MindBody (FY 2017) — 39% of revenue invested in promotion.

  2. Salesforce (FY 2018— 46% of revenue invested in promotion.

  3. Manhattan Associates (FY 2018) — 8% of revenue invested in promotion.

  4. Bottomline Technologies (FY 2018) — 21,8% of revenue invested in promotion.

  5. Tableau (FY 2018— 51% of revenue invested in promotion.

If we take the leaders of the IT market, the numbers will be even higher:

  1. Microsoft (FY 2018) — 15% of revenue invested in marketing and sales.

  2. Google/Alphabet (FY 2018— 11,9% of revenue invested in promotion.

  3. Oracle (FY 2018— 22% of revenue invested in marketing and sales.

  4. Intel (FY 2017— 1,9% of revenue invested in marketing and sales.

  5. Apple (FY 2016) — 6% of revenue invested in marketing and sales.

Leaders of the manufacturing sector:

  1. IDEXX Laboratories ( FY 2018) — 17% of revenue went to sales and marketing.

  2. Johnson & Johnson ( FY 2017— 27,7% of revenue spent on sales, marketing and management.

Leaders of the education sector:

  1. Strayer Education (FY 2017— 18,2% of revenue went to marketing.

  2. Bright Horizons (FY 2018) — 10,2% spent on sales and marketing.

  3. Grand Canyon University (FY 2018) — 13,9% spent on marketing, promotion and advertising.

If you are interested in how much startups spend on average on marketing and advertising broken down by customer interaction channels, then the numbers are as follows:

Distribution of marketing and promotion costs by channel. Source of the image

Efficiency of investments in these channels according to a survey of 2500 marketers conducted by GetResponse in partnership with Holistic Email Marketing, Smart Insights and the Content Marketing Institute, is as follows:

Survey Results on Digital Marketing Channel Effectiveness. Source of the image

Marketing Budget Example

Branding. Designing branded elements and products (from the brand and business cards to letterheads and brochures) is needed to create a holistic image of your company with customers and partners. Depending on the size, scope and goals of the business, this can take from 100 to 10 thousand dollars (usually startups cost is from 4 to 5 thousand dollars). Remember that branding creates the first impression of your company, on which its success depends on a lot, therefore it is better not to save on branding.

Web site. Frankly, if you just need a website, then you can create it yourself in a couple of hours by spending $ 100 on a domain name and hosting. But if you want your web resource to attract attention and sell products or services, as well as consistent branding, hire a web developer.

Specialists will help with positioning, SEO, content and adaptation to mobile platforms, develop a structure and design, and also help with site customization (security, user personal data, payment gateways, integration with social networks, etc.). Depending on the complexity, an all-inclusive website can cost from 3 to 10 thousand dollars.

Social networks. It’s not necessary to be present at all popular sites (Facebook, Twitter, Tumblr, Pinterest, LinkedIn, Instagram, YouTube and others), as well as to create unique content for each of them, “tailored for this platform”. It’s enough to be active in the networks that your target audience uses.

Usually it is Instagram, Facebook, YouTube and LinkedIn in America and Europe, VKontakte in the CIS, as well as WeChat, Weibo and QQ in China. The cost of marketing on social networks is from 100 to 5 thousand dollars a month for content (posts, articles, graphics, memes, tables, videos) and from 5 dollars a day for advertising. Small startups usually spend up to 2 thousand dollars a month on SMM, large - from 10 to 100 thousand a month.

Content marketing. You need stable, high-quality content to attract attention, traffic and dollars to your business. You can create content using:

Mobile app. Most people access the Internet and use web services (stores, delivery services, streaming video or audio) using mobile devices, while 80% of these users prefer to do this through an application rather than a browser. Therefore, for the success of a startup, you need a mobile application, the development of which costs from 5 to 250 thousand dollars.

Profile Events. Visiting various specialized events is perhaps the easiest way to promote, because in this case you can directly communicate with potential investors and customers. One such event can take up to 5 thousand dollars (air tickets, accommodation, meals, preparation of a presentation, etc.). There can be several such events a year, for example, in the field of video games, six major events: E3, Gamescom, IgroMir, Tokyo Game Show, Brasil Game Show and Paris Games Week.

Traditional channels. They do not work well if you need to attract people to some kind of resource on the Internet, but are still necessary for promoting startups in industries such as retail, insurance, medicine, sports, manufacturing and many other “real” sectors of the world economy.

The traditional marketing channels include television and radio, outdoor advertising, print media and magazines, as well as various events. The cost of marketing for these channels depends on the country, industry, complexity, time and many other factors. So, advertising in the regional media can cost $ 5 per column, while the price of advertising during the broadcast of the Super Bowl can go up to $ 5 million in 30 seconds of broadcast.
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