How much should agencies spend on their own self-marketing? It depends…
You can calculate cost of marketing as a percentage of revenue—between 7% and 20% of revenue, including labor costs. Yet for many agencies, headcount is an easier initial metric—between 0.5 and 5+ FTE (full-time equivalent) for an independent agency under 100 employees.
OK—but what’s the right number for your agency?
Today we’ll look at agency industry benchmarks for self-marketing spend—including how to choose between a percentage of revenue versus FTE count—and what KPI targets match your unique Values, Goals, and Resources (VGR). I cover how to prioritize your marketing efforts here.
Option 1: Cost of Marketing, as a Percentage of Revenue
In short, I recommend you spend 7-20% of your agency’s revenue on self-marketing. But there are all kinds of ranges to consider; to frame things, I’ll share two general benchmarks, and then my agency-specific benchmarks.
CMO Survey: ~8-12% of Revenue
- This represents a COVID-related surge; in past years, the figure ranged from 7.9% to 9.3% of revenue.
- B2B firms spend less on marketing than B2C firms… but in both categories, services-based companies spend a higher percentage of revenue on marketing versus product-based companies.
- As of the June 2020 survey, B2B Services firms spent 12% of revenue on marketing.
Yet nearly three-quarters of CMO Survey respondents had 100+ employees—so these results skewed toward [relatively] larger companies than most independent agencies. What about small[er] businesses, like yours?
SBA: 7-8% of Revenue
The U.S. Small Business Administration (SBA) recommends that companies under $5 million in revenue spend 7-8% of revenue on marketing. Based on that benchmark, for example:
- A company with $500,000 in revenue would spend $35,000 to $40,000 on marketing.
- A company with $1 million in revenue would spend $70,000 to $80,000 on marketing.
- A company with $4 million in revenue would spend $280,000 to $320,000 on marketing.
Those percentages are theoretically helpful—but the first example seems too low… and the second is pushing it, too.
What about agencies specifically, where their largest expense is labor—and where any employee might potentially be contributing to the agency’s marketing efforts? That’s where specialization comes in handy…
Karl’s Agency-Specific Benchmarks: 7% to 20%
When it comes to agency-specific benchmarks for self-marketing as a percentage of revenue, here’s what I recommend for independent agencies like yours:
- Less than 5% of revenue: Dangerously low
- 7-10% of revenue: Moderate investment
- 20%+ of revenue: Hyper-growth
Of course, that’s all relative, including how your agency allocates costs and how fast you’re trying to grow—more on that shortly. An early-stage agency might need to spend more—both because the expenses are high relative to their current revenue, and because they don’t have the momentum of years of marketing activities and name recognition.
Agencies tend to be inconsistent about tracking their own marketing costs. They likely wouldn’t advise their clients to do the same. #ShoeMakersKids
Be Sure to Include Both Labor and Non-Labor Costs
Your cost of marketing should include labor and non-labor expenses. Here’s a high-level summary of what goes where:
- Labor costs for marketing are pro-rated to the percentage of time that people spend on marketing. If you have freelancers who regularly contribute to your self-marketing, I’d include them (pro-rated to exclude their billable-to-your-clients time) in your labor costs.
- Non-labor costs for marketing including advertising (media) to promote the agency itself, promotional products, software subscriptions (pro-rated to exclude expenses re-billed to clients), and fees to hire other agencies to do your own marketing.
Want to find your agency’s current Cost of Marketing, as a percentage of revenue (Option 1)? Read on for my step-by-step tutorial, if you choose the “by revenue percentage” approach.
[TUTORIAL] How to Calculate Marketing as a Percentage of Revenue
Follow these steps to calculate your agency’s current Cost of Marketing, as a percentage of revenue. Note that you’ll want run the calculations a few ways—for instance, looking at last year, YTD, and the past 12 months—to smooth out seasonality.
- Pull up your accounting software, and the list of categories to include and exclude (from above). Remember, you want labor and non-labor expenses.
- Run a Profit & Loss (P&L) report, which will list revenue and expenses by various categories. As a starting point, consider looking at the last fiscal year, the current year to date (YTD), and the past 12 months.
- Identify your total revenue for the period. Depending on your software and how your accountant set up the Chart of Accounts, this might be called Total Sales, Total Income, Revenues, or Gross Profit. In QuickBooks, I use Gross Profit. Why? Because it subtracts Cost of Goods Sold (COGS), including “pass-through expenses” like media buys and printing; aside from markup, this is revenue you don’t hold onto.
- Identify your total marketing expenses for the period. Use the categories above to guide what to include and exclude. You may need to dig into specific employees’ compensation, and may need to pro-rate it. You may also need to run another report to fully calculate your own compensation, if you take some in the form of an owner’s “draw” (since that doesn’t appear on the P&L).
- Divide the marketing-related expenses by the total revenue. This is your sales expense as a percentage of sales—and you can compare it to the 3-20% benchmark.
- Repeat the process for other time periods (e.g., last year, YTD, past 12 months), to ensure you aren’t over- or under-counting things. You might also compare each percentage to the prior year’s figure, to see what’s changed year-over-year.
- Reflect on whether your current results match the amount you’re spending on marketing. If you’re over-performing, congrats! And if you’re under-performing, you’ll need to regroup on what to change. (More on that below.)
That’s a lot of work. Is there an easier way to calculate this? Yes, if you outsource it:
- Ask your accountant for advice on creating a custom report.
- Or ask your operations lead (or your accountant) to calculate this for you each month. But be sure your team is using the same inputs to calculate the percentage each time.
But revenue percentage isn’t your only option—you can also look at cost of marketing based on your team headcount (Option 2). And it’s a lot quicker to measure. Here’s how to do it…
Option 2: Cost of Marketing, Based on Your Agency’s FTE Count
If you’re looking for an easier way to track things, you can use headcount instead. (But keep in mind that it’s a less-precise benchmark, and you’ll still have non-labor marketing costs.)
What are some typical headcount-based investments in marketing? Here are some combinations I consider, based on my work with ~400 agencies worldwide:
- Under 5 people: At least 0.5 FTE should be doing marketing, and an owner would be involved in sales.
- Around 10 people: At least 0.5 FTE would be doing marketing, but another 0.5 FTE would be doing sales.
- Around 20 people: Your 20 FTE might have 1 FTE dedicated to marketing, plus a separate full-time salesperson (or potentially more than one salesperson, if you want to grow faster).
- Around 50 people: At 50 FTE, you might have 2-5 FTE working on sales and marketing, depending on how you choose to structure your sales team.
- Around 100 people: At 100 FTE, I hope you have at least 5 FTE on your own marketing, since you need lots of leads. But the specific breakdown will vary, especially if you have an “[almost] everyone must blog” requirement.
As a percentage of everyone’s hours, this ranges from ~5% to ~15% of total agency-wide hours worked. Ideally, you’re tracking time in an internal marketing category, to know your actual percentage.
Beyond specific numbers—how do you decide which approach is right for your agency? Read on.
Revenue vs. FTE: Choosing Which Self-Marketing Benchmark to Use
What’s the right benchmark choice for your agency? Most likely the number that’s straightforward to track on a consistent basis. Your ideal benchmark isn’t one that requires hours of work each month.
But the first time you do this, I recommend calculating your cost of marketing under both systems—your revenue-based percentage and your FTE-based count. This gives you a baseline—and then compare those figures to the benchmarks.
Let’s look at how to customize the specific targets for your agency. If you’re within the benchmarks but don’t like the results you’re getting, you’ll need to make some adjustments.
Customization Tips: Deciding How Much to Spend at Your Agency
How much should your agency spend on self-marketing? It depends on your agency’s unique Values, Goals, and Resources (VGR). That is: How do you choose to operate (Values), where do you want to go (Goals), and what money + people + time do you have to help you get there (Resources)?
For most agencies, the most-relevant factors are speed (how fast you want to grow), staff (who’s available to work on marketing), and cash (how much you can spend on staff and outsourced services). Let’s look at benchmark ranges for each.
Speed: How Fast You Want to Grow
If you want to grow fast—more than 30% a year—you’ll likely want to spend at least 20% of your revenue on marketing. I worked with an 8-figure agency that wanted to grow ~35% in the coming year. Their cash marketing budget was ~16%, primarily to PPC advertising. But they also had fully 10% of their FTE headcount focusing on self-marketing. Between labor and non-labor marketing costs, they were spending 20% of revenue on marketing alone. And that didn’t count their sales team.
If your growth goals are smaller—for instance, 15-20% in the coming year—you could spend 10% of revenue on marketing and be fine.
Your marketing momentum counts, too. You can never really “stop” marketing—but if you’re a large agency with a long track record and low client churn, you might be OK spending 5-10% of your revenue on self-marketing.
Staff: Who’s Available to Support Your Growth Efforts
As I mentioned earlier, even a tiny agency needs 0.5 FTE working on self-marketing. This often translates to long hours for the owner(s) in the early days, since you’re already spending your entire week on client strategy, implementation, account management, and project management. But if you don’t carve-out time early for marketing (and sales), you’ll find yourself trapped in the Agency Doldrums—especially if you acquire a Client Concentration problem.
When your headcount gets to ~20 people, it’s time to dedicate at least 1 FTE to self-marketing. But you can do it sooner, if your profit margins are strong (20-30% net, before taxes) and you want to grow faster.
If you have 50+ employees—or if your growth requires more than a few sales-qualified leads each month—you’ll likely need an entire team of self-marketing employees at your agency.
Need marketing skillsets that aren’t available from your current team—or there isn’t enough self-marketing work to justify a new employee? Outsourcing might be a match, if you have the cash. Speaking of that…
Cash: How Much You Can Spend on Staff & Outsourced Services
Tired of doing a bad job at your own marketing? You might want to hire another agency to help.
This might translate to hiring a “full-service” agency, or hiring specialist agencies in specific areas (e.g., a PPC agency, an SEO agency, a video production agency, a social media agency, an email marketing agency, etc.).
But it all requires cash. If you don’t have a lot of cash to spend on outsourcing (or hiring), you’ll need to get creative… and ensure your current team is productive.
If your marketing results are “meh” and your net profit margins are higher than 30%, you’re likely understaffed—and you should probably spend some of that excess on marketing. Speaking of marketing results…
Should We Increase or Decrease Our Marketing Spend?
Unhappy with the ROI you’re getting from your marketing today? You’re not alone… but the Cost of Marketing benchmarks can help you decide what to do next.
- You’re Spending Below the Benchmarks: If you’re under-spending, it’s time to spend more (via cash and labor) to get bigger results. Don’t have enough cash or staff time to spend more? You maybe in the Agency Doldrums.
- You’re Spending Within the Benchmarks: If you’re on the lower side of the benchmark ranges, you might increase your spend somewhat… but you also want to optimize your current marketing activities.
- You’re Spending Above the Benchmarks: If you’re over-spending on marketing and you’re unhappy with the results, you’re doing something wrong—you definitely need to do some optimization. Most common, it’s an expensive marketing employee who isn’t generating leads and/or who’s inefficient.
As a reminder, your overall (agency-wide) net profit margins should be 20-30%. Speaking of cash—how much should you spend on sales? Read on.
Questions: What’s your agency’s current Cost of Marketing? And what “should” that become in the future?
Karl Sakas 2020-07-03 17:30:29
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