Question
What is the ideal percentage of revenue that you should apply to a marketing budget for a new business?
Answer
Marketing is usually absorbed in a line item called SAG (selling, admin, general) within general balance sheets. In young businesses, where admin and general are low, SAG is almost entirely "selling costs."
The 2 basic equations for a profitable business are:
Revenue = COGS+GM (cost of goods sold plus gross margin). COGS includes labor, transport, etc. AND the salaries of your sales staff. Only the non-labor component of selling costs gets absorbed in SAG.
GM = SAG + NM (Net Margin).
SAG hovers around 25% for mature product businesses. It is higher for pure service or software businesses, possibly as high as 40%.
In a growing company, the answer depends on whether you are pre or post "product market fit" (PMF)
pre-PMF, you are basically in the hunting-for-business-model stage, and standard accounting does not represent this very well. In this case if you are losing money or making zero money, you'll have:
COGS+SAG+NM=0
or, since net margins are obviously negative 100%....
-NM=100%=COGS+SAG
It is smarter, especially for Web/media startups, to think of the right hand side as: "tech costs plus marketing costs" rather than breaking marketing across COGS and SAG (labor in the former, everything else in the latter).
Once you do this, pay attention to the ratio Marketing/Engineering. This is called the Grabowski ratio. It should be as close to 1 as possible. Historically it is known that product launches with M/E <0.1 have a very high risk of failure due to insufficient marketing spend. But remember, this is "find a business model" marketing spend, not "grow a business" spend.
A twist in the tale happens for the Web, where marketing costs can be much lower due to online marketing leverage. Unfortunately, tech costs are also lower, so M/E probably still needs to be ~1. Another twist in the tale is that a lot of apparently "tech" spend (like coding in sharing features, SEO etc.) is really marketing spend. So you may want to count part of your front-end head count and usability labor as "marketing" when you try to navigate by M/E.
Once you are past PMF, switch to the standard big company equations.
That's about all the help I can offer without knowing more about your particular business. Feel free to message me with specifics if you want more specific help.
The 2 basic equations for a profitable business are:
Revenue = COGS+GM (cost of goods sold plus gross margin). COGS includes labor, transport, etc. AND the salaries of your sales staff. Only the non-labor component of selling costs gets absorbed in SAG.
GM = SAG + NM (Net Margin).
SAG hovers around 25% for mature product businesses. It is higher for pure service or software businesses, possibly as high as 40%.
In a growing company, the answer depends on whether you are pre or post "product market fit" (PMF)
pre-PMF, you are basically in the hunting-for-business-model stage, and standard accounting does not represent this very well. In this case if you are losing money or making zero money, you'll have:
COGS+SAG+NM=0
or, since net margins are obviously negative 100%....
-NM=100%=COGS+SAG
It is smarter, especially for Web/media startups, to think of the right hand side as: "tech costs plus marketing costs" rather than breaking marketing across COGS and SAG (labor in the former, everything else in the latter).
Once you do this, pay attention to the ratio Marketing/Engineering. This is called the Grabowski ratio. It should be as close to 1 as possible. Historically it is known that product launches with M/E <0.1 have a very high risk of failure due to insufficient marketing spend. But remember, this is "find a business model" marketing spend, not "grow a business" spend.
A twist in the tale happens for the Web, where marketing costs can be much lower due to online marketing leverage. Unfortunately, tech costs are also lower, so M/E probably still needs to be ~1. Another twist in the tale is that a lot of apparently "tech" spend (like coding in sharing features, SEO etc.) is really marketing spend. So you may want to count part of your front-end head count and usability labor as "marketing" when you try to navigate by M/E.
Once you are past PMF, switch to the standard big company equations.
That's about all the help I can offer without knowing more about your particular business. Feel free to message me with specifics if you want more specific help.