The August 2011 CMO Survey reported that companies spend, on average, approximately 10% of their overall budgets on marketing. That figure is up from February 2011 where it was reported to be 8.1%. Using a 95% confidence interval, these numbers are not statistically significant from one another. This is important; but it is more important to note that marketing budgets did not decrease during this period of great economic turbulence.
Looking at descriptives, three sectors are spending on marketing as a percentage of firm budgets at roughly the same rate: B2B-services (11.1%), B2C-product (11.6%), and B2C-services (12.1%). B2B-product companies are spending significantly less (7.0%). Looking across companies of different sizes, we see that the largest companies ($500M or more in sales) are spending significantly less (5.31%) compared to companies with less than $500M in sales (11.71%). My results do not provide insight into why these differences exist. Please jump in to provide insights here.
Analysis also shows that firms that have a greater percentage of their sales from the internet spend considerably more of their budgets on marketing. Specifically, firms with 10% or more of their sales from the internet spend 16.8% of their budgets on marketing while firms that have less than 10% of their sales from the internet spend, on average, only 8.4%! A drop of 100% in the size of marketing budgets as we look across these firm strategies is striking and unexpected. Personal selling is much more expensive than internet selling, so I would expect marketing budgets to be lower at high internet sales firms. Importantly, firm overall sales and firm internet sales are negatively correlated but the figure is small and not statistically significant. This means that the relationship between marketing budget size and internet spending is not due to a firm size effect.
Figure 1. The Relationship Between Firm Internet Sales and Marketing Budget Size
How do different strategies covary with market budget size? Here are some facts from The CMO Survey. First, the amount that firms spend on social media is strongly and positively correlated with the size of the marketing budget. This is a huge effect. Considering growth strategy, results indicate that firms using a market penetration strategy (focusing on current offerings and current customers) have the smallest marketing budgets compared to firms using market development (current offerings to new customers), product development (new offerings to current customers), or diversification (new offerings and new customers). Marketing budgets follow growth. In addition, marketing budgets are higher in companies that are planning to grow through partnerships but not through acquisitions or licensing agreements.
Finally, it also looks like money follows power. Results indicate a strong and positive relationship between the CMO’s number of direct reports and her budget as a percentage of the firm’s budget. Which factor is causing the other requires more in-depth analysis. However, this result does tell us that marketing budget and marketing responsibility/power move in a positive or negative together.
The reason why big companies can spend less (i.e. 5.6%) is because there is sort of a threshold you have to spend to get good results online. Those that don’t reach that threshold don’t see success. Big companies have huge budgets and only need to spend 5.6% to beat small competitors. They’re not spending because they don’t have to. Many of them have insourced their marketing needs to rather than using consultants and agencies and therefore would spend less. They’re using their money more effectively too since they can gauge ROI for each channel and cut out the poor performers.
We’re not out of the woods with the recession yet the recent holiday sales reports are positive (see http://www.emarketer.com/PressRelease.aspx?R=1008698). The real estate industry is still hurting badly and that brings down marketing budgets for builders, agents, and furniture stores. Stimulating the real estate sector could help lift a lot of marketing budgets.
Comments well taken. The question of whether a certain level of spending is necessary to achieve effects on the web is a good one. I might have thought that in the wild wild west of social media that smart marketing (meaning clever, creative, and customer-centric marketing), could beat big budgets. This is a good debate and I welcome other hypothesis and results.
…”smart marketing (meaning clever, creative, and customer-centric marketing), could beat big budgets.”
The assumption with this is “big budgets does not mean smart marketing”…but why? Also, it indicates that marketing, in and of itself, is a primary factor in sales, as opposed to, say, an innovative product concept introduced at a fortuitous time, i.e. luck or uncontrollable/undefinable events.
My experience in business development shows that fundamental, basic marketing implementation using TQM as a basis, (rarely fully executed), achieves the maximum ROI, while bigger budgets reduces efficiency and profitability, but not effectiveness. Big companies spend a smaller percentage because once the basics are achieved, everything else is just expensive fluff.
Hi Karl, good point. In a larger study of firms, we find that return on marketing is much lower for companies with big budgets: https://faculty.fuqua.duke.edu/~moorman/Publications/JMR2003Deployment.pdf
We suggest that this is because firms do not work as hard to generate the returns when there is slack in the system.
Is online marketing costly or offline marketing? By how much percent?
Hi Pooja, I don’t have figures from The CMO Survey for your question but I think most would agree that online marketing is cheaper than offline marketing.