How Much Should Tech Startups Invest in Marketing?

Are You Sitting Uncomfortably?…

One thing B2B tech startup founders often get wrong is severely underestimating the effort, time and resources needed to build a brand, find leads, convert them into sales and grow the business. They spend too much time being distracted by technical challenges and what rivals are doing, rather than defining and dominating their own category or market niche. Even worse, they often waste energy and already scarce cash reserves on company-branded clothing and other frivolous nonsense. As a founder, if your financial allocation to productive marketing and sales activities does not make you feel at least a little uncomfortable, this is a sign you are not investing enough in the things that matter and are crucial to stimulating new business sales.

Why Startups Must Invest in Marketing

Under-resourcing your marketing is not a risk any tech startup can afford to take, especially if you continue to grow costs in other areas, such as increasing technical staff numbers. Not investing sufficiently in lead generation and sales conversion while increasing other costs is the fastest way to run out of runway and kill your startup. Do not look at marketing as optional, compared to other operations in the business. Instead, view it as what it will bring you as a return on what you spend. If, for every $1 of investment, you get $10 of revenue back, then it’s clear where you need to prioritise investment. If your startup’s sales are currently stagnating, before panicking and changing your product, messaging, website or throwing out your entire strategy, do a full review of your current marketing and sales. This will tell you where the problem lies.

How Much is Enough?

So how much should a tech startup spend on marketing? Probably more than you are spending today, at least in my somewhat biased opinion, and especially if your revenue needs to grow quickly to cover operational costs. This makes budget allocation to marketing and sales a priority to stimulate growth. When determining how much your small early-stage startup would be best placed to invest in marketing, a general rule of thumb is to allocate between 10-20% of gross annual revenue. That is a broad range to give an indication only, but a more accurate answer depends on your specific circumstances, which we will cover below. However, anything less than 10% puts you at risk of not meeting growth targets or being able to sustain them.

Here are some things you may want to consider when calculating the size of your marketing budget.

Factors Influencing the Marketing Budget for B2B Tech Startups:

1. Industry Standards:

• Tech & SaaS Startups: Tech and SaaS startups, especially in their early stages, might spend more aggressively on marketing to gain traction and market share, especially if they are creating a new product category and market niche. This means marketing budgets could be from 15-20% of annual revenue.

• Service-Based Businesses: For comparison, a business services company might spend around 5-10%, as its growth relies more on reputation and customer referrals. Tech services companies, however, may still need to spend at least 10% and above, due to the competitive nature of the industry and to help build a strong brand, regardless of any referrals, which can be irregular at best.

2. Growth Goals:

• High growth: Tech startups aiming for rapid growth and expansion are more likely to allocate a higher percentage, even exceeding 20% temporarily, to quickly capture market share.

• Sustainable Growth: Tech startups focused on steady, sustainable growth will need to consistently spend an average of 12% a year on a long-term basis.

3. Market Conditions:

• Competitive Markets: In highly competitive industries, higher marketing spend is often necessary to stand out and differentiate your business. However, established markets require less education, as customers may already be familiar and have experience of using a similar technology that is now a standard part of their business. Your sales organisation will need to be skilled at selling against the competition and swapping out existing solutions.

• Niche Markets: Tech startups in new and niche markets might require less marketing spend due to a smaller target audience and lower competition. However, it will be important to focus on educating prospects about something new and building your brand, both of which take time and effort. Your goal will be to establish the business as a recognised go-to provider specifically for that market or industry sector, which may mean tempering your growth expectations more realistically.

4. Lifecycle of Your Tech Startup:

• Early Stage: In the initial phase of establishing your startup, marketing investment may need to be proportionately higher to help stimulate growth and build brand awareness.

• Growth Stage: As your tech startup matures, marketing spend might stabilise to a consistent percentage of revenue. Growth allows that percentage to decrease slightly in line with increased revenues, maintaining a healthy budget over multiple financial years.

Recommendations From Experts

• Small Business Administration (SBA): Recommends small businesses (all industries) allocate 7-8% of their gross revenue if they’re doing less than $5 million a year in sales and their net profit margins are in the 10-12% range.

• Gartner: Suggests that, on average, companies spend around 10.5% of their revenue on marketing, though this can be higher for tech startups.

My Recommendations

• B2B tech startups will typically need to spend around 12% of annual revenue on marketing at least for the first five years of operation, if they are to achieve sustainable growth. Most B2B tech startups are not expected to be profitable in the first years of trading, which means they need to spend more on marketing than the average small business to stimulate growth and get to break even.

Below are some examples of percentage allocation.

Examples of Marketing Budgets

• Example 1: A tech startup with $1,000,000 in annual revenue might allocate 15% for marketing, equating to $150,000.

• Example 2: By comparison, a service-based tech startup with $1,000,000 in annual revenue might allocate 7%, equating to $70,000.

*Both examples would ramp up each year in line with revenue growth.

Practical Steps

1. Assess Your Goals: Define your short-term and long-term business goals and translate them into marketing objectives to support achieving them.

2. Analyse Competitors: Understand what competitors are spending their money on and adjust accordingly, not necessarily doing the same things they do – be a leader, not a follower.

3. Budget Allocation: Divide the marketing budget across various marketing activities and channels based on where you need to focus effort to achieve growth objectives – this is based on where your target audience is most active and reachable.

4. Monitor and Adjust: Regularly review the effectiveness of your marketing spend and adjust as necessary to maximise impact.

Spend, Review, Adjust

While there is no one-size-fits-all answer, a reasonable starting point for a small tech startup is to allocate between 10-20% of revenue to marketing, adjusting over time based on specific needs and goals. Monitoring the effectiveness of this spend and being flexible to adjust is key to optimising marketing investments. However, you will need to allow time for your marketing activity to make an impact; the days of generating instant responses to every marketing output are long gone. Now you must build momentum over time. Start by gaining attention and building awareness to support lead generation and pipeline growth.

You may want to read: “How to Define Your Target Market.”