How Much Should a Company Spend on Advertising?

Deciding how much to spend on advertising is one of the most important decisions a business can make. Whether you’re launching a new product, expanding your market reach, or trying to maintain customer loyalty, it’s important to get the advertising budget right. The truth is, there’s no one-size-fits-all answer. The right amount to invest in advertising depends on several factors, including your industry, business goals, and overall market conditions.

But don’t worry – by understanding the basics, you can start to set a marketing budget that works for your business and helps you achieve your marketing objectives.

Many Marketers will give you the general rule of thumb of allocating 2-5% of a company’s revenue to advertising efforts. This can be a good starting point, especially for businesses in stable or less competitive markets. It helps companies gauge their spending without overextending their resources. However, this percentage may not always be the best fit. In industries with high competition or growth ambitions, a fixed percentage can limit potential.

Our agency approaches this a bit differently. We recommend starting with a safe budget and gradually scaling it up. This continues until advertising becomes unprofitable or the demand can no longer be met. This requires accurate tracking, a solid sales process, and a clear ROI (return on investment) analysis. It allows businesses to adjust their budget based on performance. While this strategy is easier for e-commerce businesses, it can work for B2B companies too. For example, if a B2B business needs 100 leads per month at $100 per lead, they’d spend $10K per month. This model relies on generating enough volume to ensure consistent leads and stable conversion rates.

• High Growth Industries: Companies in fast-moving sectors like technology or consumer goods may invest more heavily in advertising – sometimes as much as 10% or more of revenue. These markets are highly competitive. Gaining a strong customer base quickly is essential for long-term success. In these industries, scaling marketing spend based on growth is often the most effective approach.

• Established Businesses: More mature businesses with solid marketing positioning usually have lower advertising budgets. These companies focus on maintaining brand awareness and customer retention. They prioritize nurturing their existing customers over aggressively pursuing new leads. For these businesses, tracking performance and scaling based on demand can be more effective than a fixed budget percentage. 

• B2B vs B2C: The type of business also plays a big role in determining advertising spend. Business-to-consumer (B2C) companies allocate larger advertising budgets to reach broader audiences. Business-to-business (B2B) companies, in contrast, spend less because they target smaller, more specific groups. For B2B, it’s key to scale the budget based on the leads needed to fill the sales pipeline.

While industry averages provide a helpful starting point, the real question is: How much should your company spend?

Here are a few key things to consider:

Your goals will shape your advertising budget – and, by extension, your overall marketing strategy. 

• Building Brand Awareness: If you’re trying to get your name out there, expect to spend more upfront. Building initial brand recognition often requires a larger investment, especially in crowded markets. 

• Generating Leads: If you’re focusing on turning interest into action (e.g. leads or sales), you’ll likely use more targeted advertising. This kind of approach tends to have a more measurable ROI, which can help you fine-tune your marketing budget over time.

• Customer Retention: If you’re aiming to keep your existing customers engaged and loyal, you’ll need to budget less for advertising. Retention-focused campaigns tend to be smaller but still critical for long-term success.

The competition in your industry can also impact your advertising budget. If you’re in a market with lots of players all vying for attention, you might need to spend more to stay visible. Think about it: in fast-paced industries like e-commerce, staying on top of the competition requires ongoing visibility, which translates into more advertising dollars. 

On the flip side, if you’ve found a unique selling proposition (USP) or something that really sets you apart, you may not need to pour as much into advertising. A clear point of differentiation means you can lean on word-of-mouth and organize growth rather than constantly needing to outspend competitors.

• During a Recession: It’s common for businesses to tighten their belts and reduce spending on advertising. But be careful – cutting back too much can harm your visibility and make it harder to bounce back when the economy improves. Marketing momentum plays a significant role here, and you may not feel the immediate effects of reducing your budget, but the long-term consequences can hurt your growth trajectory.

• During Growth Periods: If your business is booming, it might make sense to increase your advertising budget. Taking advantage of economic growth or new opportunities can help you capture more market share. However, just like with recession periods, increasing your budget will take time to show results. It’s essential to maintain consistent efforts over the long term to sustain the momentum.

You don’t want to spend money on ads without knowing what you’re getting in return. Measuring the ROI of your advertising campaigns is key to understanding whether your advertising budget is being used effectively.

Here are a few ways to track your success:

• Track Key Metrics: Keep an eye on metrics like website traffic, lead conversion rates, and customer lifetime value. These will give you a good idea of how your ads are performing and whether your spend is resulting in meaningful business outcomes. 
• Use Analytics Tools: Leverage platforms like Google Analytics or Facebook Ads Manager to gather insight into your ad performance. These tools will help you fine-tune your advertising budget and make data-driven decisions about future spending. 

Many companies face the challenge of understanding which campaigns and search terms are truly driving leads and sales. As a performance marketing agency, we’ve helped businesses address this by connecting campaign and search term data directly to lead performance. This allows you to see exactly where your ad spend is working and where it’s not. Our performance advertising agency has successfully helped companies optimize their marketing budgets by continuously refining campaigns based on this data, resulting in improved ROI and more effective ad spend.

So, how much should your company spend on advertising? The answer depends on your unique business needs, goals, and market conditions. While industry averages can provide a starting point, it’s important to adjust your marketing budget based on what works best for your situation. Whether you’re aiming to boost brand awareness, generate leads, or retain loyal customers, knowing how to allocate your advertising budget effectively can help you achieve the best possible results. 

By monitoring key metrics and continuously optimizing your campaigns, you’ll be able to fine-tune your marketing budget and maximize your ROI. It’s all about finding the right balance that works for your business and helps you reach your marketing goals – without breaking the bank.

If you’re ready to take the guesswork out of your advertising and marketing budget, our team is here to help you create a strategy that works and delivers the results you’re looking for.

References

• HubSpot. (n.d.). The Ultimate Guide to Setting Your Marketing Budget: Free Budget Templates. Retrieved from https://blog.hubspot.com/marketing/how-to-manage-marketing-budget-free-budget-templates

• Patel, N. (n.d.). How to Determine Your Marketing Budget: A Step-by-Step Guide. Retrieved from https://neilpatel.com/blog/marketing-budget/

• Statista. (n.d.). Advertising Spending by Industry. Retrieved from https://www.statista.com/outlook/amo/advertising/worldwide

• Google Ads Help. (n.d.). How to Measure Your Marketing ROI. Retrieved from
  https://support.google.com/google-ads/answer/14090?hl=en

• Forbes Councils. (2024, February 29). Marketing ROI: Three Foundational Rules for Successful Measuring. Retrieved from https://www.forbes.com/councils/forbestechcouncil/2024/02/29/marketing-roi-three-foundational-rules-for-successful-measuring/

• MarketingProfs. (n.d.). Zero-Based Budgeting for Marketing: A Guide. Retrieved from https://www.marketingprofs.com/

• Adweek. (2024, [Date of article]). Marketers Spend More Faster: GroupM Midyear Forecast. Retrieved from https://www.adweek.com/agencies/marketers-spend-more-faster-groupm-midyear-forecast/