Intro
Right from the start, let it be stated: There is no "average marketing budget for startups" or a universally valid statement on "what startups should spend on their marketing." Even if they come from the same industry, each startup is simply too different, with each one having distinct requirements for its marketing strategy. Especially the timing of the go-to-market necessitates different marketing tactics on a limited marketing budget: Three years ago, it might have been Instagram, then in the past two years, there were no trade shows or in-person events, only online demos, and nowadays??
...and although the premise of the entire article is that there is no such thing as an "average marketing budget for startups,"...
there are some things that all startups have in common in marketing, such as the need to reach their target audience, to "create a brand identity from scratch," and to generate leads for a new product. These activities are essential for every startup, but the way they are achieved can vary greatly from one startup to another.
A feature that gives a very good indication of whether higher or average investments in marketing are sensible is the phase of the company's growth. If the startup and its investors have evolved from the search for "a scalable business model" (Blank and Dorf) and have come to believe they have achieved a first fit in the market, then investing in marketing is a no-brainer.
And this leads us to the outlier problem that the concept of blitz scaling (Reid Hoffman) reveals: Even more so than in other organizations, there can be no "average marketing budget" for startups. Not only because each startup organization differs from one another, but because some startups simply have more money and can allocate a higher budget for their marketing to cement their market dominance. The fact that an organization is called a "startup" is not a particularly suitable category for deriving recommendations for an organizational function like marketing.
Have you heard of items in your marketing budget that you were unfamiliar with? (1/4) https://www.canva.com/design/DAFS8Ky5MA4/watch
Marketing for Startups is "talking to users"
No question: Marketing is one of the top two activities of every startup. Paul Graham, whom we (as you might have guessed) love here – said it best: "Talk to users and build your product."
Startup marketing is exactly this "talking to users" side of the coin. Whether it's product-led marketing or customer-led marketing, it's always the same: Effective marketing is knowing your customers throughout the sales and marketing funnel and understanding the value you bring to your users.
That's why I claim: Marketing is a function of sales. Because during the purchase, the transaction takes place where the promise of a solution must now match the customer's challenge. When early adopters exchange money for performance, then we have the initial product-market fit (product-market fitness). Marketing – as the verb of market – is exactly this activity of finding a fit between the value I currently offer and the audience I want to help and the buyer who sees a real business case for it.
So, what should a startup orient itself towards until the first product-market fit?
The best way for startups to determine how much they should spend on marketing is to first identify their own needs and then create an individual budget that matches a strategy and implementation of these needs. For this, talk to other founders first. They can show you what has worked or not in the past.
Communicate with marketing agencies as soon as possible. They should show you what is likely to work right now. Moreover, you will find this a good opportunity to determine in a non-binding conversation whether collaboration with this or that agency could work.
The worst thing you can do is to have a magic number in mind when it comes to your marketing budget. This often stems from the fact that your investors or your accelerator have given you a ballpark figure or because a maximum funding limit restricts what you are "allowed" to spend. Starting small and then increasing the budget as your company grows sounds logical at first. But a budget says nothing about a marketing strategy and especially nothing about its implementation. Agencies will always sell you a strategy that "fits exactly into your budget," because few have "skin in the game" when it comes to implementation.
A strong marketing strategy is essential for the effectiveness of marketing initiatives, but what effectiveness means for a startup should first be determined iteratively. Once you have identified a marketing strategy through validations and falsifications that helps you find and reach new customers, it can serve future campaigns for that target audience while you incidentally build your brand awareness.
The best way to determine your "ideal" marketing budget is therefore to experiment and track your results – using the same mode you already use to find the product's fit for the market (Product-Market Fitness). This applies both macro and micro: Always start with a small budget and increase your spending when you can foresee a positive ROI of your campaign goal. This is the power of internet marketing.
Because ultimately, marketing is the other side of the product, and only when both match will you draw resources from the value of your product. So, selling your product maximizes your runway, not funding from VCs (contrary to Product-Market Fitness, this would be the Founder Team-Capital Fitness).
What's your budget? Marketing in Startups
"What's your budget?", we will also eventually ask... if we get to that point, because much more often, we are asked by startups what the budget for a particular idea would be.
Two problems arise with the budget question.
First, the question is thought of from a simplistic solution standpoint. This leads nowhere if the problem is not yet defined: "I need painkillers because I have back pain," is nothing but a "quick fix." In marketing, this would be the equivalent of a so-called marketing hack or resorting to a traditional, no longer effective measure, such as the conventional image film.
These may help in the short term but dissipate just as quickly because they have neglected both the causal chain and the goal: "I need pain-free mobility so I can finally play with my children all day long on a Saturday."
That's why you consult with experts who get to the uncomfortable truth to then work out a solution with you.
Second, there is no "average marketing budget," even for startups. Every startup has different marketing requirements. Marketing investments depend, among other things, on your product, your target market, your competition, and your marketing goals.
Some startups need a very high marketing budget to compete with established brands in their industry. Others will manage with a much smaller budget because they have positioned themselves for their "beachhead market" in a niche or are targeting a small, very specific group of people they can reach more easily.
The best way to determine how much you should spend on your marketing is to find out in a workshop what your goals are and to develop different concepts that correspond to a defined budget. Efficiency is being creative with the creative and not choosing the cheapest offer: Because the cheapest sausage is the one with a lot of unhealthy fat, while simultaneously bringing the highest margins to the producer.
Maybe some items in your marketing budget are also initially less important? (2/4)
Startup Marketing Budget – up to 384% of revenue
There is no magic number when it comes to marketing budgets for startups, but with careful planning and execution, every startup can find the right level of spending for its
business.
Here are some historical data we've come across - not that the past is necessarily always a good parameter for predicting the future, but these can provide a rough orientation.
B2B Companies
Average marketing spending was 7.9% of revenue in 2018. Companies in the B2B market selling a product invested 6.3% of their revenue in marketing during the same period, and B2B companies offering a service spent an average of 6.9% (Source: sba.gov).
B2C Companies
B2C companies spent a bit more on average in 2018, with product companies spending 9.6% and B2C service companies spending 11.8% of their revenue on marketing measures (Source: sba.gov*).*
Advertising Expenses of Small Businesses
Small Business Trends reports that the average company spends 1.08% of its revenues on advertising, with differences from industry to industry. For example, retailers spend more (about 4%), while restaurants spend 1.93% (Source: sba.gov).
Venture-backed Startups
For startups that are venture-backed and do marketing in the B2B sector, investments range from 24 to 384 percent of their revenue (Source: scalematters.com). This really narrows down the options for how big your startup's budget should be, doesn't it?
Growth Startups – Scaleups
The growth index of Edison Partners reported in 2019 that the fast-growing companies in their portfolio spend an average of 50 percent of their revenue on sales and marketing, while slower-growing companies still spend an average of 24 percent of their revenue on sales and marketing (Source: scalematters.com). Similar figures are also stumbled upon again and again at events in Silicon Valley; usually with the subsequent comment from founders, "I never thought I'd spend more on marketing and sales than on R&D."
SaaS Startups
Tomasz Tunguz from Redpoint Ventures reported on SaaS startups that regularly spend more than 300 percent of their revenue on sales and marketing in their early growth phase (Source: tomtunguz.com).
“For our explosively fast-growing SaaS company, we invest 384% of revenue in sales and marketing in the first year. This figure declines to 253% in year two and then falls to 130% in year five.“ — Tom Tunguz
We hope these figures have shown you that they provide little insight into what you should be doing right now. The right question to ask is: What is the right marketing measure that our young company needs right now. And then follow the marketing initiative and the marketing campaign. To be able to implement the right marketing campaign within your budget, you need efficient marketing professionals. Efficiency does not mean cheap. Efficiency means doing the right thing with the right tools and skilled craftsmanship.
The best way to find out what might be right now and how much you should be spending on marketing right now is to speak with the marketing experts, who can assess the specific needs of your startup and make appropriate recommendations.ikomoritz.com/de/kontakt
Do not shy away from experimenting with different marketing strategies and not always being guided by the maximum budget that you have been able to loosen from your investors or co-founders.
Maybe these items in your marketing budget can also be neglected for now? (3/4)
Considerations and Trade-offs in Startup Marketing
Marketing vs. Advertisement
While most startups choose to focus their marketing efforts on online and digital channels, others opt for more traditional and offline methods. Some may focus on generating leads through SEO (Google Better Content Update!) and content marketing, while others may invest solely in paid advertising. The possibilities are endless, and that's precisely why it's so difficult to determine an average marketing budget across all startups.
And let's be very clear: Marketing is not the same as advertising! And just because you or your competitors spend a lot of money on advertising, success is far from guaranteed. 40-60% of an ad campaign is made up of the creative: the content part of an advertisement campaign.
So that even startups that can't spend any money on advertising at all, thanks to free distribution channels, have a real chance to establish themselves and build an audience.
Digital and Online Marketing
Among the general trends of how startups invest in marketing is a strong focus on digital marketing methods. The reason often cited is still the limited budgets in the early phase. And then it's calculated how they will likely soon increase their spending on traditional methods like TV or radio advertising. In times where individual YouTube videos cost more than German cinema productions, these lines of argumentation finally run out.
In our experience - and SaaS companies are leading the way - startups will also benefit from the advantages of a digital marketing strategy and presence in digital media in a later phase if they want to grow sustainably and above average. And complement their marketing mix with traditional channels to better utilize their resources, rather than replacing them.
Why the Internet and digital marketing are crucial beyond the startup phase
The Internet, with its online and digital marketing, is both a curse and a blessing for startups. After all, startups now have the means to bypass all the gatekeepers and rent-seekers who used to manage their PR and sell attention.
But now they are on their own to generate "buzz" and be noticed, and since everyone can shout on the Internet, they are forced to build a reputation for themselves or, as before, provide a solid marketing budget for someone else to do it for them.
So, has nothing changed? Has everything just become more strenuous?
In our opinion, there's one great thing the Internet can do that no other medium can match: You can leave a trail. A trail that will bear witness to what you've built. The danger here too is that it may never be associated with you or in a narrative not formed by you but by a generality, for which your startup was never intended (this is, by the way, a good transition to another important topic for startup founders: "Personal Branding"). Especially if your startup doesn't work out.
And that has become the biggest hurdle for many: What if someone from my environment finds out what I'm doing right now and finds it embarrassing or, even worse, finds something in my past that is no longer appropriate today?
Do not hesitate to invest in marketing as a startup: because as a startup, you are primarily a personal brand! If you have investors, then they have invested in you! And if they have invested in your technology, then you have enough money for 100K euro campaigns and won't read this blog post at all, but contact us immediately here.
Whether you do it yourself or commission someone: Most overlook the fact that the Internet has compounding capabilities and brings together the long tail, allowing you to connect with people from all walks of life in all your phases of life. But you have to leave the breadcrumbs yourself so that others can find your content and you!
Digital – the most effective marketing channel for startups
The Internet, with its inherent word-of-mouth property, is not always the cheapest option, but it is the most effective marketing channel for startups. However, you must allocate your marketing budget according to your specific industry, target market, and business goals, even in digital marketing.
One of the initial goals of your marketing should be to reach leads and sales to early adopters, not just attention. Therefore, it's important to invest in channels that reach your target audience and how you convert them into customers.
Ultimately, the best way is to experiment with different channels and see what works best for your startup in its current growth phase. Start with a small budget and scale it when initial results become visible. A certain spirit of research will help get the most out of the budget and successfully expand your marketing.
Marketing Budget by Startup Market
What is REALLY important right now and for what should I allocate a marketing budget? (4/4)
Startup Marketing as Investment
One final note: It's important to remember that marketing is an investment, not an expense. Startups should consider their marketing budget as an investment that brings tangible results over time. With this mindset, you're more likely to make wise decisions about how you allocate your resources to each initiative and get the most bang for your buck.
If you think of marketing spending as eating into your profits, you're thinking the wrong way. Marketing isn't an expense—it's an investment, one that drives your sales. Without marketing, you won't reach new potential customers, and that could mean lower sales.
Excerpt from_ "How to Get the Most Out of Your Marketing Budget" by the Small Business Administration of the U.S. federal government.
Investments in marketing are essential for every startup. The figures we've introduced make it clear that there is no one-size-fits-all answer when it comes to determining how much you should spend on marketing or what percentage startups should allocate as overall budgets for marketing. Rather, the perspective should be on general factors like industry, entry and target market, and growth goals. Details should then be discussed in personal conversations with marketing agencies (not freelancers) and they can ideally accompany you from the beginning, – even if it may not immediately lead to a commission. Then they can accompany you while you optimize your strategies and expenditures to learn what works for your young company and what doesn't.
"...at least 50 percent of sales and marketing spend by growth stage SaaS companies is nonproductive, resulting in skyrocketing customer acquisition costs (CAC), shortened capital runways, depressed growth, and ultimately lower valuations."
Excerpt from_ "Why B2B Startups Should Manage Sales & Marketing Spend Like an Investment Portfolio" by Scale Matters
