AI, ads, and pricing: How is e-commerce marketing itself?

One of the questions we see asked most often in the e-commerce and pricing space is this: As an e-commerce company, what percentage of sales should be invested in marketing?

When it comes to the size of your marketing budget, and how the funds are allocated, there are many possibilities, some more impactful than others, and every business is different. Spending will differ between brands, retailers, and marketplaces as well. It requires careful planning, exploration, and analytics to uncover the best distribution of funds across channels and to ensure your promotional activities are effective.

To help e-commerce businesses understand top areas of marketing investment in the current retail climate, Omnia is diving into the latest trends for the size of e-commerce marketing budgets and how those funds will be spent in the years to come. But before we discuss the future, let’s cover how we got here and the current landscape.

Mass hiring and then firing: Factors laying the foundation for the change in marketing priorities

The e-commerce industry as a whole experienced significant swings in sales during the COVID-19 pandemic and as it started to ease. Lockdowns encouraged consumers to buy online, and more than 100 million people worldwide shopped online for the first time, expanding the existing pool of two billion digital shoppers. While brands saw a more gradual increase in sales, retailers and marketplaces experienced a more drastic spike as customers looked for places where they could buy many products in one place. For example, Amazon experienced a 57% increase in sales during the second quarter of 2020.

This significant growth trend, and the consumer demand that drove it, meant many e-commerce companies were increasing budgets and headcount to meet the moment. 

• Hiring skyrocketed: The UK, for example, saw a 345% increase year-over-year in posted e-commerce management jobs in June 2021. Amazon added 427,300 employees in just 10 months, averaging 1,400 per day in 2020. Facebook added approximately 10,000 jobs in the same year. In keeping with the rapid growth they were experiencing, retailers made up 30% of all e-commerce job offers in 2021.
  
  
• Marketing budgets increased: One CMO survey found that while companies planned to spend 11.3% of their budgets on marketing in February 2020, by June 2020 that number had increased to 12.6%. On Facebook and Instagram, marketing spend increased by 50% between 2020 and 2021.

As the pandemic has eased, however, the e-commerce spike has readjusted. 2022 brought about a number of challenges: high inflation, the war in Ukraine, and economic uncertainty, all of which have impacted the global economy and e-commerce companies of all sizes. Online sellers have seemed to align with the general downturn trend we have seen from software and tech businesses in North America and Europe, with marketplace giants like Amazon and eBay cutting thousands of jobs in late 2022 and early 2023, even amidst the seasonal holiday shopping period. Another group hit hard were home goods retailers, with Wayfair laying off nearly 10% of its workforce and Made.com filing for insolvency just 16 months after its IPO.

Tightening purse strings across the economy mean companies are being more intentional with spending, and many marketers are being asked to defend their budgets. While Marketing Week found that Q4 2022 was the seventh consecutive quarter with a net increase in marketing spending, the falling axe still remains, as 86% of CEOs expect a recession in 2023 with marketing budgets usually the first to get slashed.

How much do e-commerce companies spend on marketing?

Calculating marketing budgets can be a tricky task even in a thriving economy: If you invest too heavily, you could be left in a bad financial situation, and if you don't spend enough, your products may go unnoticed and unpurchased. Alternatively, if you’re spending the bulk of your budget in the wrong channel or platform, your strategy needs to be reorganised. That's why staying flexible with your budget can ensure you're able to adapt to changes, stay on top of your marketing efforts, and be ready to scale as your business expands.

That being said, it is helpful to have some benchmarks to work from. Data compiled by the US Small Business Association recommends B2C businesses like e-commerce companies should spend 7-8% of their revenue on marketing. However, other sources estimate average e-commerce marketing spending to be between 15-20% of revenue, with some spending up to 30% to acquire customers. A 2020 CMO Survey from Deloitte found that product-focused B2C companies are spending 15.9% of revenue on marketing initiatives.

The wide range of 7-30% might seem unhelpful, but it gives a good general understanding of the marketing investment e-commerce companies make. Most would likely fall somewhere in the middle, with newer or ambitious companies spending more as a proportion of revenue to fuel growth and more established companies spending a lower percentage for steady, incremental growth.  

Within the context of our current environment, most marketers aren’t expecting to decrease budgets in 2023. A HubSpot survey of 1,000 marketers found that 47% said their budget would increase and 45% expected their budgets to stay about the same.

Source: Hubspot

E-commerce marketing budgets

As we move further into 2023, we’re continuing to see new trends in usage of certain marketing strategies and the allocation of marketing spend among e-commerce companies. Any marketing strategy will be held up by some basic pillars: historically, many talked about the 4 Ps of marketing, but these days that framework is often extended to the Seven Ps of marketing:

All seven pillars of the marketing mix are important, but some are experiencing more significant shifts in the current e-commerce landscape. For example, Promotion is constantly in flux due to the changing advertising environment. Although it is still only the third largest advertising platform, Amazon’s ad business is growing fast, while digital ad giants like Google and Meta are facing slowdowns in ad revenue. Elsewhere in the industry, Apple is exploring bringing more ads to iPhone apps but also rolled out a major privacy feature in 2021 that requires iOS users to “give explicit permission for apps to track their behaviour and sell their personal data, such as age, location, spending habits and health information, to advertisers.” This has significant ramifications for any company advertising to iPhone users.

Digital ads and paid search aren’t the only avenue for promotion, of course. Other common channels that continue to expand in influence include:

• Content marketing
• SEO
• Email
• Social media
• Affiliate marketing
• Referrals

One area that many companies are cutting budgets in is software, and e-commerce marketing teams are likely to be asked to cut their SaaS spending as well. Since there is a SaaS tool for just about any marketing need, cutting spending in this area could impact any of the Ps in the marketing mix, but will likely impact Process and People the most. At the same time, we are witnessing major advancements in AI, such as ChatGPT, which is already impacting tools across the marketing stack. More marketing budget may be allocated for AI-enabled software going forward to increase efficiencies in the marketing organisation. 

Finally, one P in the marketing mix is getting more attention in e-commerce than ever before – Price. And it’s with good reason: McKinsey found that improving pricing by just 1% can raise profits by 6%. That’s a far bigger impact than a 1% reduction in variable costs or fixed costs, which can boost profits by 3.8% and 1.1% respectively. 

The e-commerce marketing budget can and should evolve over time

For most e-commerce businesses, whether retailers, brands, or marketplaces, marketing budgets and their allocation will always vary. This could be due to the seasonal nature of your product, the evolving strategies of competitors, or how your quarter is going.

Keeping your marketing budget stable as a portion of your company's revenue keeps you in a solid financial position, but it also means you'll need to re-evaluate marketing budgets when you analyse financial reports. The total budget amount and allocation will also need to be consistently revisited to ensure the team is keeping with current trends and using resources on the highest-performing channels. 

Make sure to check in with your marketing strategy monthly and quarterly, while ensuring your e-commerce team is maintaining their skills and knowledge in paid media, social commerce, and emerging marketing trends.