Knowing what your competitors spend on marketing can be immensely valuable. As a challenger brand against a major incumbent, for example, or as a market leader entering a new region, your competitors’ marketing budgets often define your strategy. They inform how much you spend, what you spend it on, and where you spend it. Remember that marketing is an operating expense. Too much kills profit yet too little kills businesses. This post explains a back-of-the-envelope approach to rapidly estimate how much your competitors spend on marketing.
The goal of this analysis is to isolate marketing from SG&A using a series of four estimates, then use heuristics—guides for speculation—to refine your numbers. Start by pulling 10Ks for your public competitors. If the major players in your industry are not public companies, pick several nearest neighbors and I’ll provide guidance for adjustments later on. From the income statement, record three key figures: revenue, SG&A, and advertising spending (usually tucked away in notes, but required in the 10K).
Starting with revenue, base your first estimate on common-sized analysis. The Global 1000 spend an average of 6% of their revenue on marketing. My experience in technology is that this figure ranges from 4 to 7%. Knowing your own firm’s common-sized marketing budget will inform you as to where in this range your competitors are most likely to fall. There are other simple heuristics to consider as well. Consumer-focused industries tend to spend more on marketing and less on sales. Larger companies achieve economies of scale that smaller (and many private) companies cannot, therefore often spending less on marketing as a percent of revenue. Finally, current marketing activities like sustained national advertising can inflate budgets and distort single-year comparisons.
Your second estimate is marketing as a multiple of advertising. In technology, my experience is that marketing budgets are usually 3 to 5 times advertising. Again, scale can increase this multiple (advertising becomes less costly) and a consumer focus can lower it (a greater portion of marketing goes to conventional advertising). Competitors focused on emerging markets, where advertising is cheaper, can also afford to spend proportionally less.
Your third estimate is an application of your company’s ratios to your competitors. What would they be spending if their common-sized marketing ratio and advertising multiple were equivalent to yours? How do their heuristics of scale, sales composition, and geography compare with yours?
The fourth and final estimate is built from industry research. Analysts often estimate total marketing spend across industries and you can break this up by company market share or share of voice. Media clearinghouses often calculate ad spending by segment and this can be used for proportional budget estimates between firms or in relation to public data. Use industry research of this type to ground your assumptions.
Finally, be cautious with your sources. Asian accounting standards often include R&D with SG&A, which confounds this approach. Reported advertising figures are rarely pure and may include other activities such as direct marketing. Knowing your industry and its dominant forms of marketing will sharpen your results.
The estimates above will provide a range of values for each company in your analysis. Collectively applied, heuristics such as the examples I provided are sufficient to indicate where in the range each of your competitors’ actual spending is most likely to fall. The goal isn’t perfect accuracy, but a sound approach that will quickly get you in the right ballpark for insightful decisions. A little digging and informed judgment will help you deliver.
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