Researching 600+ Sales & Marketing Budgets
We analyse the sales & marketing budgets of more than 600 listed companies to provide the most accurate predictions on how budgets are allocated. This is of value to marketers, investors and C-Suite executive that often rely on broad industry heuristics. We then turned it into a sales & marketing budget calculator. Here we explain how and the implications.
Valuable industry insight
Almost every resource allocation across a business is scrutinised in minute detail. A CMO will be involved in regular reporting and management and performance across all marketing activities. However, the actual size of the sales & marketing budget, despite its importance, is rarely analysed with the same rigour. There is no established methodology and only a handful of research surveys that present the broad allocations based on individual self-reporting rather than financial reporting.
A natural consequence is marketing activities that are not as effective or efficient as they could be. Marketing teams may also be distracted by queries around allocation, while competitors may be able to exploit opportunities.
Building a model
We painstakingly built a unique data set based on annual reports of ‘sales & marketing expenses’. These figures are not recorded by every company. This means that are rarely given the strutiny they deserve. So, by putting in the hard work to build the data set, our analysis is based on the actual spending on sales & marketing of more than 600 companies.
Selecting profitable pubic companies
We only selected figures from profitable companies that are listed on the leading indices (S&P, Nasdaq, Stoxx and FTSE). This was an important first step to make sure that the figures came from companies that deliver value to their customers from their marketing activities.
We selected the leading indices to assess the importance of location and business size as influential factors. In doing so, we collated more than 600 figures (634), analysing many more in the process.
Identifying key factors
With our dataset built, we analysed every factor we could think of that might influence budget allocations. This included factors such as: Business Size, Geographical Coverage and Business Model (B2C or B2B). However, we quickly realised that they have little or no overall influence on allocations as a proportion of revenue. This was a valuable finding in itself.
We then dug a little deeper and used AI tools to run through a wealth of additional factors (e.g. date founded, physical inventory, sales cycle, number of competitors, market position) and once again found very little influence on the major differences between allocations. Once again a very valuable finding in itself. Taken collectively, we then settled on two factors that have a major influence at a population level.
Factor 1: Primary Industry
Industry had a major influence on budget allocations but this nuanced. The classification of industries had to be very specific, when it usually isn’t. We found this by initially placing each business in to 12 supersectors, which resulted in very messy findings. This is because when categorised more loosely, many very different businesses can sit within the same category, negating this factors influence. For example, Airbnb and Ryanair could be classified in the same broad ‘travel industry’ category.
This called for a more careful approach to classification based on the primary rudiments of each business as a determining factor on sales & marketing allocations. In doing so, we considered software businesses as a separate category on their own. This is because software businesses only create software, so irrespective of the industry, they have comparatively fewer overheads and little opportunity to create a real-world brand impression. We then settled on seventeen broad categories. However, these are by no means perfect. Ultimately, successful businesses often straddle categories, which can be a key component of their success.
Factor 2: Gross margin
Relying on category as a single metric is insufficient because of the major operating costs that different types of businesses have. As a result, we introduced another metric ‘gross margin’ as a percentage, which accounted for the cost of sales compared to revenue for each of the companies in the dataset. This enabled us to evaluate the relationships between operating costs, revenues and sales & marketing budgets. When placed in context with ‘primary category’, this factor increases the reliability of the model significantly.
Setting a benchmark
We weren’t aiming for a perfect model. Instead, we want to better analyse the variance between budget allocations of businesses by taking out predictable factors. The model is therefore very valuable as it accounts for roughly 50% of the variance when the predicted values are compared against the actual budgets for each of the businesses. This moderate correlation (r squared = 0.545) was much higher than we expected and illustrates a general framework that businesses use to allocate sales & marketing budgets.
More importantly, this modellying is quite different to the common wisdom about budget allocation. Notably, allocations are widely reported as much lower figures as a % of revenue than we found. Instead, we reveal that budgets often reach 30-50% of revenue. This is for profitable businesses that are listed and not startups, which is a valuable takeaway for marketers. Marketing is often pivotal to businesses in the long term.
Consequently, the model and the associated free tool is one of the most valuable ways that any established business can assess a benchmark for the sales & marketing budget they should set. It is less applicable for unprofitable and startup business, which are often investment led and are yet to find their position in the market. But it stands to reason that they will likely need even larger budget allocations to establish a foothold in the market.
Analysing outliers
What we can say with some certainty is that the following two conditions account for most of the variance:
Business complexity
Most successful businesses are complex. This is because they usually develop market resilience through additional services and product offerings. Many of the businesses we analysed were difficult to classify on this basis beyond a primary category. For example, a manufacturer may be a retailer, and so on. In practice, this requires the nuance of an analyst considering the constituent parts of each business on a case by case basis. It is also worth noting that very few businesses are exactly the same. Instead, what usually happens is that a business will compete in one area but often quite different services in another.
Budget allocations are cultural
Unlike cost of sales metrics, where a business will carefully consider margins, marketing metrics are more elusive and difficult to quantify. This is also unlikely to ever change because the modelling process used by each business will be on the basis of different assumptions and criteria.
This is a valuable finding as many businesses build their cultures around their approach to sales & marketing. Consequently, they continue to allocate budgets by iterating year on year.
Much more to cover
This tool and research once again brings into question the accuracy with which businesses allocated their sales & marketing budgets. This wrap up is succinct in the interest of brevity, but if you’d like to discuss your allocations in greater detail, then please do get in touch. We’d love to work with you. In the meantime, we hope you enjoy our full suite of free tools.
Welcome to Posito
We make marketing more effective in three areas. Check out our research, insight pieces and FREE tools.