Marketing is crucial to helping a life science business grow. There are many different areas of marketing that your organisation can invest in, from conducting life sciences market research and creating your life sciences marketing strategy, through to executional aspects such as inbound marketing, content creation, paid advertising, public relations, digital marketing and more. Different strategies are appropriate for different goals. The best choice may depend on whether you want to increase brand awareness, generate leads, nurture leads into customers, or all of the above.
A key question we are often asked centres around how much a life science company should invest in these marketing activities to set a marketing budget. While there are various ways to calculate a marketing budget, there are four methods we typically use with our clients. These are:
- Method 1. Setting a marketing budget based on target company revenue
- Method 2. Setting a marketing budget based on revenue growth goals
- Method 3. Setting a marketing budget based on revenue growth and profit margin data
- Method 4. Setting a marketing budget based on customer revenue projections and campaign success metrics
In this blog, we’ll cover what these four methods involve and how you can use them to calculate an appropriate marketing budget based on your business size, revenues, profit margins and growth goals.
Putting together a marketing budget can also be time-consuming, so we’ve built a series of handy marketing budget calculators to make this faster and easier. You’ll find these calculators at the end of each section.
What is a marketing budget?
Before we delve deeper into the four budgeting methods, let’s first clarify what defines a marketing budget. Essentially, a marketing budget outlines the amount of money a business has assigned for its marketing function to spend in a given time frame, typically annually. The budget will usually include things like the cost of your marketing team’s compensation, software that’s used specifically for marketing purposes, paid advertising, outsourced services (e.g., freelancers and agencies), and any other marketing-related activities
Your marketing budget provides visibility for your business on marketing spend, will help your marketing team stay on track financially, and prepare for future spend. It will also make it easier to think through the relationships between marketing and revenue generation, including how to set yourself up for success to deliver a positive return on investment.
In the next section of this blog post, we’ll explore different ways to calculate your marketing budget, depending on the context of your business and goals.
Warning! There are lots of formulas, numbers and calculations below – but don’t worry if these seem a bit fiddly and complex, you can simply enter your specific numbers into the calculators we have built, and these will do all the number crunching for you.
Method 1. Set the marketing budget based on target company revenue
One way to set your annual marketing budget is to base it on the annual revenue target of your business for the upcoming year.
Budgeting using this method usually includes all costs related to marketing, including headcount, software subscriptions, paid media spend, outsourced activities, etc. If a company is looking to drive rapid growth, in general, it should invest more in its marketing and sales efforts.
For context, the average B2B marketing budget based on revenue is usually somewhere between 7-13%. However, we typically see anywhere from 1-10% of target revenue tends to be more in line with what we typically see in the life sciences (as it stands, there are no available benchmarks in the life science sector – if you want to help us fix this, fill in the short poll at the end of this blog post).
Working with these approximations, we can often set an appropriate total marketing budget for a life science company. For example, if your company’s 2023 target revenue is £10million, then your marketing budget could vary as follows, depending on the company’s growth goals:
- 1% of revenue = £100,000 marketing budget (slow or zero growth)
- 5% of revenue = £500,000 marketing budget (moderate growth)
- 10% of revenue = £1million marketing budget (rapid growth)
Of course, it's worth keeping in mind that there are a lot of assumptions that underpin this model and that it might not be appropriate for all companies (e.g. distributors, SaaS companies, high-volume/low-margin businesses etc.). Keep that in mind and ensure you are setting marketing goals and budgets that are appropriate to your organisation's business model.
To calculate your annual marketing budget using this method, you’ll need to know what your company’s overall annual revenue target is. You can then work out your marketing budget based on the expected growth of the company using the following calculation:
Overall company revenue target x Percentage of revenue (as a decimal)
= £ Marketing budget
For example, a life science business with an annual target revenue of £5million looking to experience moderate growth might allocate 5% of its revenue to its marketing budget. In this case, the calculation would be:
5,000,000 x 0.05 = 250,000
This is a simple model for calculating your marketing budget, but it can still be very powerful for identifying whether you are investing an appropriate amount in marketing based on your growth goals.
To employ this model, use the calculator below to calculate your marketing budget based on your target annual revenue and your growth goals.
Method 2. Set the marketing budget based on revenue growth goals
Another way of budgeting is by setting a specific marketing budget based on growth in a key area (such as a particular product or market segment). In this case, it can be more appropriate to budget around these specific growth goals rather than the growth goals of the company as a whole.
When setting a marketing budget based on revenue growth goals in a specific area of the business, it’s often assumed that the company's overall marketing budget will cover the existing marketing infrastructure, such as internal headcount, software etc. Instead, this budget will typically be directly invested in activities to drive customer acquisition associated with that specific growth area, including brand awareness, lead generation, lead nurturing, and sales enablement. In practice, this budget usually covers elements such as paid media spend, outsourced services, and sometimes the hiring of additional internal team members.
To calculate your marketing budget based on your company’s revenue growth goals, first set your goal and then consider what type of Return on Marketing Investment (ROMI) you are targeting. Your ROMI is usually calculated as follows:
(Total revenue – Total marketing spend) / Total marketing spend
Common industry benchmarks for ROMI (based on revenue) are:
- 2x = weak ROMI
- 5x = good ROMI
- 10x = excellent ROMI
As an example, if a life science company is looking to grow revenue for a particular product by £1million over the course of a year, we can use this target to set a 12-month marketing budget based on an attractive ROMI. In this case:
- 2x ROMI (weak) = marketing spend of £333,000
- 5x ROMI (good) = marketing spend of £167,000
- 10x ROMI (excellent) = marketing spend of £91,000
For this example, a realistic budget against the product growth goal is likely to be somewhere between £100,000 and £150,000.
What about numbers specific to your marketing team? Simply identify a relevant growth area and target revenue for your business and enter the data into the calculator below. Then enter your marketing budget. The resulting ROMI value will give you some insight into whether your budget is likely to deliver an attractive but realistic return on investment. You can also play with the marketing budget figure if you are aiming for a very specific ROMI.
Method 3. Set the marketing budget based on target revenue and profit margin data
Budgeting method 2 is helpful if you don’t know the gross profit margin of a particular product, service or business unit. However, if you do have access to profit margin data, you can use this to give yourself more confidence in generating a return on investment from your marketing efforts.
Let's look at an example to explore how you can use target revenue, profit margin and target ROMI to calculate an appropriate marketing budget. For this example, we'll assume that a life science company has a new product to sell and is looking to make £1million in revenue. The company’s gross profit margin is 50%, meaning the cost of goods sold (COGS) associated with the product is £500,000, leaving £500,000 in profit. How much of the projected profit is worth investing in marketing to drive the revenue we are aiming for?
To help answer this question, we can use common industry benchmarks for ROMI based on gross profit margin. These are:
- 1x = weak ROMI
- 2x = good ROMI
- 5x = excellent ROMI
Based on the benchmarks above, we can set a marketing budget based on a realistic ROMI for the business:
- 1x ROMI (weak) = marketing spend of £250,000
- 2x ROMI (good) = marketing spend of £167,000
- 5x ROMI (excellent) = marketing spend of £83,500
In this case, a realistic budget is likely to be somewhere around £100,000.
These calculations are a bit more complex than our first method. However, don’t worry! You can simply enter your company’s target revenue and gross profit margin into the calculator below. If you then adjust the marketing spend number, you can determine your marketing budget based on your ideal ROMI.
Method 4. Set the marketing budget based on customer revenue projections and campaign success metrics
The final budgeting model we use estimates the marketing budget for a specific campaign. This method is particularly appropriate when conducting lead generation or lead nurturing programs. In essence, this approach requires you to map out your sales funnel more precisely, calculating how many leads you need to generate to deliver against a specific revenue target (so you can then set the marketing budget based on these insights).
While this budgeting method is a bit more complex than the other methods we’ve covered so far, it can provide more clarity and accuracy, especially when it comes to defining specific marketing key performance indicators (KPIs) for your campaigns.
When using this budgeting model, it’s generally assumed that you will only include revenue targets for the leads that will be generated by your marketing efforts (not your sales team). If your sales team will produce their own leads, you’ll need to set the number of leads and customers that only marketing will be responsible for generating, and then enter those into the model.
To use this model, you will need to provide approximate conversion metrics at each stage of your sales funnel. We recommend starting at the bottom of the funnel by setting goals around how much revenue you are aiming to generate, as well as how many customers you’ll need to acquire to reach that revenue goal. From here, you can work your way up the funnel, estimating conversion rates at every step (or using real-world benchmark data from your sales process, if they are available). This will allow you to calculate how many leads you will need to generate in order to reach your target revenue goal.
As an example, let’s assume that a life science business is looking to make £1million in additional revenue as part of a new product launch campaign, where marketing will be responsible for generating a number of leads to fuel the sales process. Let’s also assume that each product sells for £10,000, meaning that the company will need to sell 100 units to hit this target.
From here, we need to work our way up the sale funnel, looking at the conversion rate at each step to calculate how many opportunities, sales-qualified leads, marketing-qualified leads, and leads we need to reach our customer and revenue goal. Some sample data for this example has been added in the figure below, with the overall outcome that we predict that we’ll need to generate 2000 leads to reach our revenue objective.
Working against a lead target of 2000, we can use a range of methods to set the marketing budget. One approach we commonly use is to leverage average cost-per-lead (CPL) benchmark data to estimate the necessary budget. For example, the average CPL in the healthcare industry is around £150 (benchmark data for other areas of the life science sector are not currently available). You can calculate CPL by using the following formula:
Total amount spent / Total attributed leads
= Cost-per-lead (CPL)
Based on our example:
- At £50 CPL, the budget should be £100,000 (excellent CPL for most companies)
- At £100 CPL, the budget should be £200,000 (good CPL for most companies)
- At £200 CPL, the budget should be £400,000 (weak CPL for most companies)
Ideally, an appropriate CPL target for the campaign should be set based on your own past benchmark data (as CPLs can vary a lot depending on the services and/or products you offer, the markets you work in, etc.). When calculating the target CPL, you can include paid ad spend only, or all of the marketing costs associated with the campaign, so it is important to stipulate which model will be used when setting the target CPL and calculating the necessary budget.
By combining this model with some of the other models we’ve already described, it’s possible to validate the goals and budget. For example, at £100 per lead, the budget is £200,000. Based on a target revenue of £1million, this would be a ROMI of 4x (relatively strong). This data would suggest that you can afford to spend anywhere up to £200,000 on this program, aiming for £100 per lead or less – if you can get closer to £50 per lead, then the program would have been even more successful. If £100 per lead is likely to be challenging to achieve, then you’ll need to either focus on lower cost tactics or work on improving the conversion rates within your sales process before looking to generate more leads through tactics like paid advertising.
How can you use this model? Simply enter your company’s target revenue, price per unit of your product/service (or customer lifetime value, if more appropriate) and estimations of your sales funnel metrics in our calculator below – set your target cost per lead and the calculator will show you your suggested marketing budget (and associated ROMI). As a quick reminder, we recommend starting at the bottom of the funnel with revenue and customer goals, working back from there. As such, the calculator asks you for these numbers first and then guides you through the rest of the process.
Important things to keep in mind when using these budgeting models
While these methods are very useful budgeting tools for life science companies, like any models, they are not without weaknesses. Below, we’ve covered a few things to consider when using the ideas and calculators above:
- Most of the models above involve predicting the future, whether that’s estimating target revenue, funnel conversion rates, or likely CPL. Even if you base your calculations on past data (e.g., previous CPL), this doesn’t mean the future will follow the trend. As such, when setting a marketing budget, keep in mind that you are looking to “speculate to accumulate” (and are taking an informed risk in the process).
- While marketing plays a significant role in driving lead generation and customer acquisition within the modern marketing and sales mix, some business models are still very driven by business development teams (and not marketing). In these cases, the marketing budgets estimated by our tools may be overly large for the needs of your company (and it might make sense to invest more in sales instead, e.g. hire more business development reps).
- On a similar note, the sales process of many life science businesses is complex, with customers expecting to speak to a sales rep during their buying journey (who then plays a critical role in closing the deal). Therefore, while marketing can and should set goals based on factors like lead generation, customer acquisition, and revenue, we also need to recognise that marketing sometimes has a limited direct influence on success indicators like revenue generation. The marketing team will also need to work closely with the sales team to achieve these goals.
- For some life science businesses, customer lifetime value might be a better value to use than average purchase value per unit, especially for those companies using recurring revenue business models (e.g. SaaS companies and those that generate recurring revenue through the ongoing sales of consumables and reagents).
- The "ideal targets" for some of the factors given above (e.g. CPL, ROMI) are based on averages across a wide range of different business types. As such, please defer to your specific benchmarks where appropriate. For example, the average deal size for some life science companies can often be in the millions of dollars (e.g. Contract Research and Contract Manufacturing providers), making it economically viable for those organisations to spend much more per lead (as long as at least one of those leads goes on to become a customer).
- It can be tempting to default to model 4, as it is very data-driven and makes it possible to set a marketing budget based on the number of leads and sales you aim to deliver. While this is a powerful model, it doesn’t take into account the value of investing in strategies designed to drive brand awareness, credibility, thought leadership, etc. Keep this in mind when using all the models, but especially model number 4.
How should you calculate your marketing budget?
Now that we’ve been through four common ways of calculating your marketing budget, how might you choose which one will work best for you? To help answer this question, your best approach will really depend on the specific situation of your life science company, but in the first instance, calculating your marketing budget as a percentage of revenue is a solid, straight-forward way to go. We then suggest using either your sales funnel conversion metrics or revenue growth goals to determine your marketing budget for individual campaigns or product launches.
Want to know what the average marketing budget is in the life sciences industry?
Fill out our anonymous poll below and share your marketing budget as a percentage of revenue. This will then reveal the answers that other life science companies have shared.