How Much do Startups Spend on Marketing
Starting a business is like a NASCAR race, but the owner is not fastened, there is no door and windshield, and the race itself is held on the edge of a cliff above the ocean. Why? Startup confidence is unstable due to the lack of clear answers to various questions:
It is very difficult to accurately calculate the return on investment for marketing costs, since sales depend not only on the quality of the product, but also on the behavior of potential customers.
Therefore, there is never a definite answer as to how much startups need to spend on marketing. The answer will depend on the unique characteristics of the company and product, target audience, location. It is important to consider whether you received funding or invest exclusively in your funds.
However, there are a few unique considerations that can guide startup marketing expenses, regardless of industry.
Budgeting is very important in the initial stages of marketing. As a rule, startups don’t have much money for the first work, so you have to make ends meet with a limited budget.
The very first step is not a market analysis or selection of consultants: it all comes after. First of all, you need to understand how much money you can really allocate for a marketing campaign. To get approximate figures, you need to calculate the remaining costs (registration, hiring employees, production, office rental, and so on).
If you are just starting up, then this is the only way to evaluate your budget. If you had your first sales, then the marketing budget can be based on a percentage of profits. Many startup founders in the first couple invest 5% -7%. But these are only approximate figures, and they can vary.
The last decade is characterized by sharp annual changes in approaches to doing business, including conducting marketing campaigns. Entrance in 2010 showed a big increase, but after the average budget did not change much.
Changes in marketing costs over the past 10 years. Source of the image
As can be seen in the graph, the average cost was 8-10% of the total budget. But it’s important to understand that the results of a CMO study are based on existing companies, not startups. A stable business can afford to spend less on promotion, as it already has a certain credit of trust and reputation.
Knowledge of the industry and the market must be taken into account even before the development of the budget. Internal records allow you to calculate ROI.
Also, among the costs of marketing, it is worth highlighting SMM, the use of mobile promotion tools, training for marketing employees, development (or acquisition) of tools for sale. They are in the advertising strategy of any company for every year. There are other costs that already depend on the niche and policies of the company.
Ways to use your marketing budget. Source of the image
The lion's share of the budget allocated for promotion is the cost of marketing technology. According to Gartner, today it is the largest investment area. It includes the already mentioned mobile marketing tools, as well as platforms for content and project management, analytics tools.
Also, marketing innovations always make part of the costs (regardless of the industry and the duration of the business). Every day there are more and more specialists who bring their own creatives and completely change the approach. In addition, companies must adapt to customer behavior on the go, which is impossible without innovation.
Some analysts advise not to invest more than 5% of sales in the marketing budget. As already shown in the graph above, over the past 10 years, this recommendation has almost never been adhered to. Obviously, the success of a company, and especially a startup, largely depends on the quality of promotion.
“A man who stops advertising to save money is like a man who stops a clock to save time.” © H. Ford.
When preparing a budget for advertising, it is important for the startup or business idea owner not to clearly follow the recommendations, but only to take them into account. How to form it? Refer to the results of market research and the target audience. Understanding the behavior of potential customers, you can choose the best channels for promotion. Accordingly, it will be much easier to budget.
Try to name all the marketing channels. How many came to mind in the first place? Probably about 15. This is not more than 10% of the opportunities available now. You can list all advertising channels, but their simultaneous use will not be effective.
An attempt to capture everything at once will lead to the fact that you do not have enough time and resources to bring each channel to mind. Outcome: excess of acceptable costs and lack of payback.
Your marketing channels must be aligned with your business goals. Divide them into short, medium and long term. In a startup, they will depend on the total starting capital and secured investments. For example, attracting a certain number of customers and obtaining new financing is a short-term goal. And scaling and expanding the range of services is long-term.
Objectively, a startup cannot pursue a large number of goals. Why? There is still no complete understanding of the specifics of the industry, and most importantly, the client’s reaction to the product or service. Therefore, it is important to formulate the most important goals and choose the best channels for promotion for them.
Thus, the marketing budget will be directly proportional to the amount of funding and will not go beyond the permissible.
For marketing costs to be worth it, you need to have a clear idea of how valuable your conversion efforts are. It is easy for established companies to derive these figures, since they are guided by relevant statistics. Startups can only make forecasts. But they are needed to understand real productivity.
How to calculate the cost of one client? Take the cost of sales and marketing for a certain period of time and divide by the number of customers acquired. That sounds easy. But impossible for a company that has not yet entered the market.
Calculation of customer life value
In this case, leave room for forecasts. Marketing audit and analysis of competitors will give an idea of how many customers can be obtained in the first time. Accordingly, the cost of one buyer will be fuzzy, but you can create a margin of acceptable costs.
Some startups do not even do this, losing most of their potential customers. Others invest too much, which translates into low payback or even loss. A site is needed. But at the initial stage, a small information portal is enough, which will give a clear idea of the company and the product.
The importance of a site for business. Source of the image
Depending on the area in which you plan to launch a startup, you can choose one of two options:
If you are sufficiently knowledgeable in technology and marketing research will show that the site’s need is low, you can use services like Wix, Weebly or Squarespace. Based on templates it’s easy to create a website without code knowledge.
But if you are not very familiar with computer technology, it is best to hire a team of specialists. Of course, this will require more costs, but later it will be a profitable investment. Especially if the site will form the basis of your business (for example, a startup in the field of E-commerce). Merehead team is ready to provide its services for the development and design of a website for startup.
Novice entrepreneurs often follow the advice of established businesses. Can this be called a mistake?
As already mentioned, experienced companies spend about 10% of their capital on marketing. But they don’t need to create primary brand recognition, because in this case their success and satisfied customers work for them.
Owners of such a business recommend that startups invest up to 25% of the initial budget in marketing. Why is this needed? Become a "virus" in the head of potential customers. The more he hears and sees about a startup, the more interest will be shown. This is far from a new concept of promotion, but it still works.
Startups rarely have large budgets. Therefore, very often they analyze the possibilities of free advertising (or with minimal costs of up to $ 100). Where to start?
Analyze what value you can provide your potential customers through the content? In other words, what can you teach them, how can you help you do your job better and gain trust? If the idea is quite original, then it is enough to describe its essence (even in the text) and drop it on several forums.
To reinforce the result, you can create a short video and create a small site. How to spend a minimum on such services? Look for freelancers on Upwork. But be prepared that only beginners agree to work with a small budget, because there are no guarantees of effectiveness.
The basis of the budget is to invest the cost of creating content (articles, blogs, reports, statistics). All this provides a lot of information, but has a low cost.
If your startup is in the very early stages and you have no investors or sales, the budget can be very small. It often happens that there is practically no money for marketing. In this situation, it is useful to have an idea of the strategies and tools available for free (well, or for a nominal fee).
One of these tactics is communication with influential people in the industry. Is there a personal meeting opportunity? Use it so that a potential client finds out about your existence. In addition, comment on posts of famous personalities on social networks and share their content. This will certainly create minimal brand recognition.
Sometimes this can be a very boring job. But commenting on Twitter, Facebook, or LinkedIn doesn't cost a penny. But an interesting answer will attract the first potential customers.
Speaking of potential costs, most people think only of the budget. But startup and business website ideas are not only about money, but also about time.
The reason is that startups tend to have small budgets. As a result, regardless of the allocated funds, you will try to do as much marketing yourself as possible. But what are you really capable of?
If you devote it 100% of the time, then:
As a rule, startups should spend about 20% of their time on marketing. For example, if in a week you work on a business for 70 hours, then 14 must be allocated for promotion. If in the first months you notice that there are few customers, but the quality of the product is high, then marketing needs to be given much more time. But don't cross the 50% mark.
The key to a successful marketing investment is experimentation and testing. You can’t invest the entire budget in the first creative. It is necessary to check its effectiveness. One way to test ideas is with Google Adwords. You can break up part of the capital into several small tests. Analysis of the results will help to form the final budget for marketing and achieve the highest return on investment.
So how much do startups spend on marketing? As you can see, there is no clear answer to this question, since a lot of factors need to be analyzed. The only true answer exists in only one way: do not spend a dime if the budget is too small.
In other cases, be guided by the indicators and conclusions of analysts.
You can act like most startups and allocate no more than 5% of the total budget for marketing. You can act as well-established companies and spend about 10% of your funds. Or you can follow the recommendations of experienced entrepreneurs and invest as much as possible, adhering to the 25% margin.