Inc. Query

Q Is there any rule of thumb for what to budget for sales and marketing? We are a 14-year-old electronic-media and corporate-meeting production company with annual revenues of about $15 million. For the past several years, we've budgeted 7% of our gross revenues for sales and 2% for marketing. We probably spend a bit more than others in our trade association; however, we've increased sales by about 20% a year for the past four years. Nevertheless, we're wondering: is there a benchmark for professional business-to-business service companies? How about for other industries? --Ken Mills, Mills/James Productions, Columbus, Ohio

A. You want numbers? Have we got numbers! In fact, we've got hard-to-find stats on the spending habits of entrepreneurs. In our 1998 Inc. 500 survey of the fastest-growing private companies in America, we asked the companies' chief executives to estimate their sales-and-marketing expense as a percentage of overall 1997 revenues. The average? Just over 10%.

A little context is in order: the Inc. 500 average reflects CEOs who view their entire payroll as one big sales-and-marketing expense, as well as those who claim to do almost no sales and marketing. To be sure, plenty of Inc. 500 companies spent less than 10% of revenues on sales and marketing. Half the group spent less than 6%, in fact. But over the years, the Inc. 500 average has hovered around 10%.

So back to Mills's first question: is there a rule of thumb? "Not that I know of," says Don Peppers, a marketing consultant based in Stamford, Conn., and partner of Marketing 1to1/Peppers and Rogers Group, a 1998 Inc. 500 winner. Peppers devoted 10% to 15% of his revenues to sales and marketing, but he doesn't place any significance on the number.

"Ten percent is a number handed down from marketing folklore," offers A.J. Fraties, president of the Raiford Co., a sales-force consulting firm in San Carlos, Calif. "If you read [Harvard Business School professor] Michael Porter and others on how to build marketing models, 10% is what you think you should do."

But what's "high" or "low" depends on who's counting. In a survey published in 1996, the American Marketing Association (AMA) reported that in 1994 business-to-business companies spent an average of 3.49% of revenues on "marketing," which the AMA defined as direct-selling expenses (sales salaries, commissions, and bonuses), marketing communications (advertising, direct mail, public relations, and so forth), marketing support, market research, and telemarketing. But the smallest companies spent more than the average, the AMA also found.

How does that compare with what really large companies spend? In 1998 large public companies in the service industries (other than health care), for example, shelled out an average of 5.5% of revenues for advertising and promotions alone, according to Schonfeld & Associates, in Riverwoods, Ill., publisher of Advertising Ratios & Budgets.

But national averages matter less than how you stack up in your own industry. For Ken Mills's sake, we looked at Caribiner International, a publicly traded company and a prominent player in his industry. Caribiner's $4.2-million increase in direct selling expenses, as reported in the company's 1997 Form 10-K, eclipsed Mills's entire sales-and-marketing budget by three times. But we also gleaned that less than 1% of Caribiner's 1997 sales of $342 million went to advertising.

Finally, we focused on a subgroup of 88 Inc. 500 companies in media, business services, and financial services, because those fields are similar to Mills's type of business for benchmarking purposes. Zooming in on that subgroup paid off. The average for the 88 companies was lower than the average for the Inc. 500 as a whole--just 8.7%. That puts Mills/James's total of 9% for sales and marketing right on the money. --Susan Greco

What the Inc. 500 spend on sales and marketing
Percentage of revenues Percentage of 1998 Inc. 500 companies
Less than 1% 3%
1% to 5% 43%
6% to 10% 25%
11% to 20% 18%
21% to 50% 9%
More than 50% 1%
Note: Figures do not add up to 100% because of rounding. Source: Responses of 426 companies surveyed for the October 1998 Inc. 500 issue.