How to justify the right B2B marketing budget

In the B2B market, after employee salaries, marketing is usually one of (if not the biggest) expense for a company. As a marketing manager, you are therefore in charge of ensuring that your dollars are spent in the most productive manner possible and commit yourself to ensure that your marketing activities generate a positive return on investment. This is even more important, because if you can prove that marketing is cost-effective, then you can justify any budget request and even additional budget! So, let's look at how to set up and justify a marketing budget in B2B.

What percentage of revenue should be spent on marketing?

For years, the average marketing budget for small B2B companies was encouraged to be between 6% and 7% of revenues.

This type of marketing budget was supposed to be appropriate if your revenues were less than $5 million and your margins were between 10% and 12% of gross revenues. I've heard 10% - 12% before, but you have to understand what that includes. Some people see sales-related expenses (CRM, sales incentives, etc.) as part of the marketing budget, while for others it is part of the sales budget. Certainly not everyone has the same definition of marketing. In addition, some business models, based exclusively on online sales for example, obviously require more marketing budget. Besides, an established company seeking to promote well-known products or services should spend less than a start-up launching a new product or service.

You should therefore make up your own mind about your budget based on your environment, your business model and the market. With the current pandemic, we have globally seen corporate expense budgets and revenues fall, but marketing budgets have been less affected due to the marketing priorities of building customer loyalty and maintaining brand awareness. According to the CMO Survey from the American Marketing Association issued on February 2020, the marketing budget for a B2B products company should be 9% of a company’s revenues, and 7.9%. for a B2B services company. All this, of course, is in an ideal world, for all sectors of activity and companies of all sizes combined.

The budgets I've seen in Quebec, for established companies with less than 500 employees in B2B, with a sales force on the field, are more around 7% - 8%. For start-up or companies starting with marketing, it is more around 2% - 3% of revenues. And for those that sell exclusively online, it is more like 12% - 15% of revenues.

Should you go for a monthly or an annual budget? I suggest a monthly budget plan. I recommend this type of approach because it allows you to more easily follow the evolution of your expenses in regard to your budget. You will also want to track your Key Performance Indicators (KPIs) and a monthly approach makes it easier to link the indicators to the budget established.

Fixed costs

Fixed costs are usually the easiest budget’s elements to evaluate. They are mainly salaries and benefits.

• Salaries

These are the gross salaries of the employees from the marketing team EXCLUDING payroll taxes. Don't forget to plan a salary increase starting from the month it will be granted by the company. This information is provided by Human Resources. You also need to consider the employees you plan to hire and add their salaries.

• Social charges and other benefits

These are the benefits and payroll taxes the company pays to the various levels of government. It also includes the cost of group insurance plans offered to employees, cell phone plans, etc. It is usually between 12% to 15% of gross salaries. For big companies it is likely to be 20% to 25% because they usually offer more benefits. This information is provided by the accounting department.

Variable costs

Variable costs are generally the elements of the budget that are not associated with campaigns, or not related to the activities that DIRECTLY generate sales opportunities ("leads").

• Travel and lodging

These are the costs of travel by land or air. Ground travel can be car rental costs as well as mileage allowance costs for the use of a private car. To this, you need to add meals, hotel expenses and any other expenses during a trip. Based on my experiences, I would usually dictates the following average costs for budgetary purposes:

• Travel to Europe: $1,000 for airfare, $75/day for car rental, $400/day for accommodation and meals.
• Travel to the United States: $600 for airfare, $50 / day for car rental, $325 / day for lodging and meals.

• Training costs

The cost of training fees for team members. Please note here that some conferences require travel and accommodation expenses. In Quebec, some training costs are eligible for tax credits, but they are not reflected inside your budget.

• Consultation fees

If you work with consultants, this is usually where you should put your expenses. Consulting fees are often expenses where specific expertise is required, but not related to lead gen. For example, this could be the development costs of the integration of a marketing app into your CRM, etc.

• Legal costs

These are fees related to the registration of trademarks, logos and branding in general.

Campaign costs

Campaign costs are elements of the budget that are specifically associated with campaigns or with the generation of sales opportunities ("leads").

• Consultation fees

These costs are often costs where specific expertise is required and where there is no internal resources to do the job. The most common consulting expenses are:

• Writing expenses if you do not have someone responsible for content creation.
• Translation into different languages.
• Graphic design, infographics, or anything related to visuals.
• Photography, personalized services, excluding subscription to generic photo sites.
• Production and editing of promotional videos.

Fairs or trade shows

These costs relate to the participation or organization of trade shows. Marketing travel and accommodation costs for trade shows must be budgeted in the travel and accommodation expense account. They usually include:

• Registration fees.
• Booth shipping costs, mailing costs, (including customs duties if necessary).
• Promotional items to be distributed during the show.
• Clothing to be provided to employees with the corporate image or logo.

Subscriptions

I separate subscriptions into 3 categories, those related to the use of online marketing tools or cloud and those related to the use of artistic elements (visual or graphic) used for campaigns or website including social media:

• Marketing tools: Automated marketing platform (e.g. Marketo, HubSpot, etc.), social media programming tools (e.g. Buffer, etc.) or any other online marketing platform and tool generally offered in cloud mode.
• Artistic elements: subscriptions to stock image and photo websites (e.g. iStock, Shutterstock) or music websites (e.g. Shockwave) that can be used for website or video production.
• Web hosting: the cost related to hosting your website or microsites.

Public Relations

Unless you’re a big company, it is quite rare to see internal resources dedicated to communication and public relations activities. If you do public relations or media relations, this is where you should put these expenses. They are often associated with agency fees.

Web development

The website is the key element of a content strategy and therefore very important. There is often a person dedicated to website management. Development can be done in-house using internal programmers, but often requires the expertise of an external firm. This expense is often used for agency fees.

Digital marketing

After salaries, it is often where you have the most marketing expense. It usually covers 2 types of expenses:

• SEO (Search Engine Optimization): Website optimization using keywords for search engines. This type of work is a marketing specialty and is often handled by an external agency specialized in this area. This strategy generates traffic FREE OF CHARGE without advertising placement.
• SEA (Search Engine Advertising): which is the PAID advertising placement on search engines.

Whether it is SEO or SEA, this type of expense usually involves agency fees and the purchase of ad placement, keywords, etc. Agency fees normally represent 25% to 35% of the digital budget. The development of the global budget for this area is often difficult to establish due to a lack of meaningful historical data. However, it is easy to make conservative or aggressive assumptions. The following method is very mathematical and, in my opinion, the best way to justify it. Instead of starting with defining the digital marketing budget, start with your objectives and do reverse engineering from there.

1. Identify the additional income demanded from sales, where marketing could play a major role in generating that income.

EX: Let's use $10 million for this example.

2. Divide the additional income by the value of your average transaction for the current year, and you get the number of sales transactions the marketing should generate.

EX: the average transaction: $20K, therefore $10M/$20K = 500 deals.

3. Take your conversion rate for sales transactions to identify the number of sales opportunities.

EX: In this case, 20% of the marketing opportunities were converted into sales. 500 / 20% = 2,500 sales opportunities should be generated by marketing.

4. Next, we need to determine the number of marketing opportunities that will need to be converted into sales opportunities, so we need to know the ratio of marketing opportunities to sales opportunities’ conversion.

EX: Let's assume here that 40% of marketing opportunities are converted into sales opportunities. 2,500 / 40% = 6,250 marketing opportunities must therefore be generated by marketing.

5. By having the Cost Per Lead (CPL) we can then determine a good part of the marketing budget. It is not perfect, but it is a good estimate.

EX: If the cost per opportunity is say $100 (weighted average SEO and SEA), then the required budget will be $625,000, meaning 6,250 opportunities at $100. Therefore, a budget of $625,000 will be required for digital marketing (SEO & SEA). Again, it is one approach, there are many others out there.

In short

If it were that easy, everyone would just add up the fixed, variable and campaign costs to get a marketing budget representing a 7% or 8% of the company's revenues. In reality, it is quite a different story, and this calculation rarely reaches the desired percentage of revenue. We must therefore review all the elements, one at a time, by eliminating expenses or campaigns in order to justify our spend according to the budget that has been allocated to us. Also make sure that your budget is in line with your marketing plan. Again, a marketing plan is just as important, if not even more, because the budget is drawn from that plan itself. This article gives you tips on how to create a marketing plan. But, wait, I almost forgot, a little something before I conclude. I highly encourage you to make a fictive expense in your budget so you can be prepared for any eventuality. Usually this "hidden" expense represents 3% to 5% of my budget, but don't tell anyone!