Energy companies without a marketing department or executive level marketing staff member too often arrive at an annual marketing and sales budget by determining how much the company can comfortably afford, subtracting sales person salaries, and then revising that figure downward to make it more palatable to the Owner/President/CEO. While some understand that marketing plays a vital role in empowering a company to meet its objectives, others do not, and do not spend accordingly.
But if not based on affordability, on what should one base a marketing and sales budget?
Company Objectives: You can also set an optimal marketing and sales mix based on a sound strategy to achieve certain objectives. This approach requires that experienced marketing and sales managers create a Marketing Communications Strategy that is designed to accomplish the company’s targets and objectives. The plan must include detailed tactics with associated costs. Those costs are then totalled, and that figure is the required budget.
Percentage of Revenue: The time-honored method of setting a budget is to base it on a percentage of historical or projected revenue, which is a common top-down approach. Revenue is a result of marketing and sales, so not spending enough on it hampers a company’s revenue generating potential. Few small to medium-sized energy companies (1,000 employees or less) spend this large of a percentage of gross revenue on marketing. Still, companies need to leave room in their budgets for marketing and should spend between 1% and 5% of gross revenue on marketing, depending on industry maturity, reputation, customer churn, and level of competition.
Volume: Another means of determining one’s marketing budget is to calculate what the cost of marketing and sales is for each unit of the product or service to be sold, not to be confused with cost of goods sold, and then to determine the expected volume of sales. This is a variation of the percentage of revenue method, but it frames the budget in a way that focuses on units of sale. The limitation of this method is that without accurate historical data it can be difficult to determine the cost to sell each unit. This method is excellent for companies that are limited by production or service capacity.
Competitive Parity: This approach is based on competitors’ marketing and sales spends. Simply look at what a competitor of around the same size is spending on marketing and sales, and spend the same. This on its own is rarely an efficient strategy as companies’ have different marketing and communications strategies, resources, and situations. It can also be difficult to obtain information on competitors’ marketing spends.
Many successful companies will cite 10% of annual revenue as the prevailing wisdom, but the truth is that the amount companies spend on marketing and sales varies greatly depending on their industry, service type, stage of growth, and competition, among other external factors. Specifically, in the energy industry, B2B companies have elaborate and extensive sales functions that require strong direct sales representatives whose salaries range from $100,000 to $300,000+ CAD. This is critically important for Oil and Gas companies in Western Canada and the United States, where deals often go to the firmest handshake.
For most energy companies to be competitive, they should spend at least 7% of annual revenue on marketing alone, including planning, digital marketing, brand upkeep and strategy, and advertising, among other marketing initiatives. A company that makes $100 M annually should spend around $7,000,000 on marketing to be competitive. One that makes $6 M annually, should spend at least $420,000 to be competitive.
Regardless of which of the above methods your company chooses to determine its marketing budget, it will likely be limited by available funds, regardless of its needs, objectives or how much revenue it is expecting to make or has made. Limiting factors are a fact of life, but particularly in the highly competitive Western Canadian energy industry, you cannot forget the link between promotion and revenue. A budget should be determined by following an objective, well-reasoned process that makes available the resources your company needs to succeed.