As a marketer in the manufacturing industry, you understand the importance of investing in marketing efforts to achieve growth and expansion. However, when revenues start to decline due to changing market forces, the natural response is to reduce marketing expenses. But is this really the best approach? In this blog post, we will explore the difference between fixed and variable marketing expenses and how they can impact your company’s revenue growth and marketing ROI.
Marketing as a Variable Expense
Let’s start with a hypothetical scenario.
Suppose your company invests $500,000 in marketing in 2021 to target a total market of $100 million. With this investment, your company captures a 5% market share, resulting in $5 million in revenue.
In 2022, your company still invests $500,000 because that’s 10% of the prior year’s revenue.
However, the total market shrinks to $80 million in 2022, so while just like in 2021 your investment will net 5% market share, since the overall market shrank, that 5% only amounts to $4 million dollars in revenue. If we carry 10% of revenues forward as marketing investment, we only have $400k to work with in 2023.
In 2023, another down year with $80M total market share to capture your $400,000 marketing investment, captures 4% of the hypothetical market, resulting in only $3.2 million in revenue.
This sets you up for only a $320,000 marketing investment in 2024.
In 2024, the market recovers and the total market is valued at $120M but because you base your budget on prior years’ revenue, you are only in a position to capture a measly 3.2% of that market, generating $3.8 million in revenue.
Marketing as a Fixed Expense
Now let’s re-run this scenario, but this time with a fixed marketing expense model.
Your company invests $500,000 in marketing in 2021 and maintains this investment throughout the four-year period.
In 2022, the total market shrinks to $80 million, but your company still captures a 5% market share, resulting in $4 million in revenue.
This trend continues in 2023, with $4 million in revenue from a 5% market share.
But here’s the kicker. In 2024, when the market bounces back to $120 million, your company captures a full 5% market share, resulting in revenue of $6 million.
Variable vs. Fixed
Comparing the two models, the fixed marketing expense model requires a total investment of $2 million over four years but nets out $19 million in revenue, resulting in a marketing as a percentage of revenue of 10.5%.
In contrast, the variable cost model requires a total investment of $1.7 million over four years but only generates $16 million in revenue, resulting in a marketing as a percentage of revenue of 10.6%.
While these numbers are hypothetical, we found that fixed beats variable far more often than not across a wide array of scenarios in market fluctuation.
The Benefits of Fixed Marketing Expenses
One of the primary benefits of fixed marketing expenses is predictability. By investing a fixed amount of money in marketing, your company can maintain a consistent level of advertising and promotional efforts, regardless of changes in market forces or revenue. This approach provides more stability and helps your company to maintain its market share during economic downturns.
Moreover, fixed marketing expenses allow for better planning and budgeting, making it easier to allocate resources and measure ROI. This approach enables your company to create long-term marketing strategies and allocate funds more effectively.
Another benefit of fixed marketing expenses is reduced risk. In the variable cost model, your company’s marketing investment fluctuates based on revenue, resulting in unpredictable expenses. This approach can create challenges in budgeting and lead to reduced marketing efforts during economic downturns. By contrast, the fixed cost model provides more stability and enables your company to maintain consistent marketing efforts, regardless of market forces.
How to Implement a Fixed Marketing Expense Model
Implementing a fixed marketing expense model requires careful planning and budgeting. First, you need to determine how much to invest in marketing each year. This amount should be based on your company’s revenue and marketing goals. Once you have established a fixed marketing budget, you can allocate funds for specific marketing channels, such as social media, content marketing, email marketing, and advertising. It is essential to create a marketing plan that aligns with your company’s goals and values.
To make the most of your fixed marketing expenses, it is also important to track and measure the performance of your marketing campaigns. You can use metrics such as website traffic, click-through rates, conversion rates, and customer engagement to assess the effectiveness of your marketing efforts. By analyzing these metrics regularly, you can make adjustments to your marketing strategy and maximize the ROI of your fixed marketing expenses.
Fixed marketing expenses can provide numerous benefits for B2B manufacturing companies, including stability, predictability, and reduced risk. By implementing a fixed marketing expense model, your company can maintain a consistent level of advertising and promotional efforts, regardless of changes in market forces or revenue. Moreover, fixed marketing expenses can enable your company to create long-term marketing strategies, allocate funds more effectively, and measure the ROI of your marketing efforts.
At Brilliant Metrics, we understand the importance of marketing strategy and its impact on your company’s success. If you want to learn more about marketing strategy and how to implement a fixed marketing expense model, be sure to subscribe to our newsletter for more video and blog content. Our team of marketing experts is also always here to help your B2B manufacturing company achieve its marketing goals and continuously improve.