How to decide the size of your marketing budget? or Viewing marketing as an investment instead of cost let you make a better decision

I, and I suppose most of us, have often heard people asking questions along the line of “What is a reasonable marketing cost as a percentage of revenue?”, which is an interesting angle to determining marketing spending. I would argue that if marketing only represents a cost for you then you might as well cut it out. The purpose of marketing, as I am sure most people would agree, is to make more money. Thus, marketing should be viewed as an investment. Marketing as an investment is difficult to understand, partly because the long term effects are hard to measure.

I would pose that if you knew exactly how much you would have to spend in marketing to get one extra sale then you would be able to determine your marketing budget quite easily and logically. This however, to the dismay of many marketers, is a difficult and often impossible task. But if we stick to the economic assumption that the first marketing activity you buy is the one that gets you the highest yield/cost ratio, and when that resource is exhausted you move to the next best, then the marginal returns of marketing does decline. In this case the marginal ROI (the derivative of ROI)  will eventually reach a point in which adding extra money to marketing, is equal to adding that extra money to the second best investment (let’s say new production facilities, or a better webpage or whatever). Identifying this point is of course impossible for most businesses.

One way to approach logical thinking is to ask, if I add x money to the budget, how many more customers will that buy me? And if so, what happens if I add 2x, and so forth. Correspondingly, you should ask, if I don’t add x, what else could I use that money on, and how would that effect the value of my business? What if I remove x? The problem with this approach is that it may to some extent be based on a gut feeling rather than on actual performance metrics, in a scientific sense, but still this may be a better way to think about marketing. I would also like to note that the practice of assigning a given percentage of revenue, or budget or whatever to marketing is one that is widely criticized, because it does not look at what your business actually needs. The main lesson here is to think “what does that next dollar buy me?” and “what else could I have bought for that dollar?”.