“How much should a professional services firm spend on marketing?”
is one of the most common questions practice leaders and marketers in professional services ask me.
An agency colleague told me recently that the correct answer from most marketers is always “more.” Yet, most partners and business leaders almost always answer “less.” The right answer is an Occam’s Razor response (i.e. the most simple one).
Firm leaders often wait with bated breath for annual breakdowns of marketing spend and the latest marketing tactics (fads du jour). They wonder, “Is 1% of revenues enough? Is 2%? What about 5%?” One would come to believe that people ask the question to rationalize the lowest number. In my experience, the question is asked and the benchmarks are required because firms lack a strategic marketing mindset and/or execution capability. Here’s why.
When clients ask me how much to spend on marketing, I ask them two questions:
- What strategic objective do you have (growth rate, market share, brand awareness, etc.)?
- How fast do you want to achieve it?
When you are clear on the result and the timeframe, the investment level comes into sight very clearly. The faster you want to reach your strategic objective, the more money you need to spend. A longer timeframe allows you to spend less, Occam’s Razor.
I suspect you are now thinking,“…but that doesn’t really give me the answer because I don’t know how to equate time and money with a return.” Great point. That is a different question with a different answer. I call that the Do-Get equation: “What’s my “Get” get in return for “Doing” (fill in the blank)?” If you cannot answer that question, your firm is probably not effectively measuring your Marketing’s performance.
Let me illustrate by using a simple example for a firm to calculate the Do-Get equation.
How to determine the “right” marketing spend for a professional services firm
Measuring what you “Get” for what you “Do”
Let’s hypothetically say a managing partner wants to grow 20% from $10 million to $12 million (the strategic objective) and wants to know what it is going to take to get there. We need a few historical data points to determine the number of leads and opportunities needed to fill the revenue funnel.
- Your average project/deal size in dollars. (source: CRM)
- Your client churn rate in client number. (source: Accounting)
- Your pipeline conversion rates. (source: CRM)
DOWNLOAD: Professional Services Revenue Funnel Requirements Tool
Using historic conversion rates and churn, you now have an idea of the number of leads you need (180 opportunities/yr. and 15 opportunities/mo.) to reach your goal in the chosen time frame (1 yr.).
If you effectively measure your marketing efforts, you should be able to produce a table that outlines channel marketing performance (See the table below).
We can see that sales and marketing produced 149 opportunities last year. To hit the $12 million revenue growth objective in our example within one year ($2 million new + $250K churn replacement = $2.25 million in growth), we require roughly 31 additional opportunities (180 new – 149 historic = 31 gap) to reach our goal. We now have a target.
The table shows that the firm is currently spending 9.6% of revenue on Marketing ($963K Cost/$10MM Revenue = 9.63%). Assuming the firm’s marketing performance does not change, it needs to increase total marketing spend by $200,356 (31 additional opportunities x $6463 Avg. Cost/Opp.) or 21% to close the gap in one year. Assuming that the investment pays off, the firm would be spending 9.7% of revenue on marketing ($1,163,356 Cost /$12,000,000 Revenue).
Alternatively, the firm could use the Pipeline/Cost Ratios in the Marketing Effectiveness table, to develop alternative marketing mixes and commensurate investment levels to hit the lead, opportunity, and revenue goals.
Takeaway
There is simply no “correct” or single number to “How much should a professional services firm spend on Marketing?” —or any industry for that matter. Your marketing spend is neither your competitors’ spend nor the industry’s average spend because goals, Sales and Marketing effectiveness, and risk tolerances differ.
Your number is the amount that gets you where you want to go when you want to get there.
If you cannot afford the requisite level of investment, you have three options.
- You can scale back growth goals (lower your revenue number). Not a popular option.
- Reduce client churn. This is a very desirable goal, but it is often as much a function of a business model as of client service.
- Increase sales and/or marketing effectiveness (conversion rates). Get Sales and Marketing better at converting more leads to more opportunities, converting more opportunities to more wins.
- Increase Client Lifetime value or average engagement size.
Which one of those choices offers the highest Do-Get ROI for your timeframe and investment capacity?
You now clearly know “how much to spend on marketing.” Simple, but not easy.
Be prudent.
