Taras Gorbul, founder and CEO of marketing agency Superheroes and a partner in the event agency Idealsecrets tells when to spend more on advertising.
Marketing is the driving force of any company. Last time I told you in what way it affects the profit, which is the main purpose of any business. Needless to say, you need to invest something for this profit to appear. On average, a business spends 7.6% of its budget on a marketing expense item. Is this a regular indicator for the market? Is it possible to save on marketing, or you need to increase activity, and therefore spend more? Everything depends on the stage of the life cycle where your company is. It is not the only factor, but anyway the key one.
Peculiarities of marketing start-ups
I have already explained in my first article why knowledge of marketing, and its presence in business in general, is the most important component of entrepreneurship. Nevertheless, knowledge itself is not enough, it is also important to invest budget, time, and effort. In real life, 49% of small and medium-sized businesses spend on marketing only 2 hours a week or even less. At the same time, more than half of the companies have a dedicated team for these tasks. That’s why it comes as no surprise that 9 out of 10 companies eventually disappear. On the other hand, 10% of companies successfully exist in the market even 5 years after opening. Moreover, start-ups with non-standard ideas often become unicorns. It is debatable to claim the uniqueness of the idea, but it is definitely possible to talk about detailed marketing, when each component of business processes is appropriately introduced into the market.
The high rate of business closures is quite understandable, considering the fact that start-ups spend only 2-3% of their revenue on marketing while it is recommended to use 7-8%. We should understand that such figures are typical for businesses with the annual turnover of up to $5 million and with the net profit accounting for 10-12%. If you don’t have such results, then you have to double, or better triple the above-mentioned spendings on marketing.
I understand that a start-up business has scores of tasks that require money but believe me, this action will pay off. The thing is, immediately after opening, the company is at the initial stage of its life cycle. And exactly during this period the amount of the allocated budget defines what position you will occupy in the market, whether you will be able to become a giant or remain a microbusiness. According to Forbes, a start-up can become a larger business if:
it is likely to be bought;
the business opens more than one office;
the company receives revenue of more than $20 million;
the business has more than 80 employees.
Almost all of these statements are impossible without proper marketing which includes a lot of stages at the start:
Developing marketing concept of business.
Brand voice formation.
Presentation of business offline and online.
Gaining brand trust.
You should also consider the fact that if you introduce a unique product, you should warm up the market and show the audience its true problems and demands as well as possibilities of solving their problems and covering their demands with the help of your solutions and product.
Start-ups have one big plus though, if you make a mistake, you will not lose millions and billions, as it can be in case with business sharks. You can try new formats, and sooner or later (if you pay enough attention to marketing, of course) you will succeed and become a business shark or a unicorn company. Large companies simply do not have such an opportunity.
Peculiarities of marketing business sharks
It is said that due to the Covid-19 pandemic, the market has completely fallen, and companies beg for every dollar. It’s a lie! The capitalization of companies in the Global Top 100 from March 2019 to the same period in 2020 increased by 48%. Think about it, by half! Why? They are not mean when budgeting for marketing.
The leading companies in the market spend 6 to 51% on promotion. Let’s consider this figure in terms of their revenues!
The distribution of the marketing budget depending on the market orientation of the company:
SaaS companies – the marketing budget is 8-51%, revenue decline/growth is -1.6% – + 32 %.
Technology companies – the marketing budget is 11.9-22%, revenue growth is 4.2-23%.
Manufacturing companies – the marketing budget is 17-27.7%, revenue growth is 6.7-12%.
Education – the marketing budget is 10.2–18.2%, the decline/growth of revenue is -13.2% – + 8.7%.
If your company is not Apple, you should not even think about marketing expenditures of less than 10%. There is one important feature here. Market leaders spend such money not only to “play” with revenues, but to hold their market. Coca-Cola decided not to increase the budget during the pandemic, and as a result slightly lost to PepsiCo, which showed an increase in marketing expenditures since 2019 by 16.6%.
The thing is, companies like Apple and Coca-Cola are in the stage of maturity on the life cycle curve and they can stay in this stage for decades or even centuries. However, as soon as the company takes the wrong step, it will come into decline. What comes next? Stock prices falling, market share reduction, profit decrease, shrinking line of products, and (if the company does not launch a totally new product) then a closure.
Such companies do not spend the marketing budget to appear regularly in contextual advertising, they demonstrate their social values as a part of corporate policy and branding. For example, in 2018 Burger King increased its rating by 30 positions having become the most successful brand in the market in terms of the effectiveness of the advertising campaign. McWhopper Proposal company has become one of the top 10, and Backyard Burger King – one of the top 100. Will it bring the profit to a company? Yes, but not directly. The more people talk about them, the more they are interested in. This process has been going on for years while many generations have changed. If people grow up hearing about the brand, the brand will be steadily on top.
Which is more difficult: promoting a start-up or building marketing for leaders? It is a rhetorical question.
Start-ups have a lot of problems before the business enters into a more or less stable operation process. Nevertheless, it is important to understand, no matter how much the entrepreneur spends on streamlining production processes and delivery, the business will not get new customers without introducing these victories in the advertising message. Moreover, you lose even active customers without advertising yourself.
A start-up business with a competent marketing strategy can grow, develop and capture the leading market share in future, and hence rise to the top of the life cycle. The more you focus on marketing, the more results you get.
Marketing is the possibility not to fall for market leaders. One accident at the production site provokes a scandal, one mistake in positioning or tolerance leads to the loss of a huge audience. This refers not to 10 or 20 customers, but to 10 – 20 thousand or even million customers. Marketing equals stability.
What is more difficult: to spend 7-8% on marketing at the start, and develop or to spend up to 50% at the peak of popularity to maintain stability? It is up to you.
Author: Taras Gorbul, founder and CEO of marketing agency Superheroes