How To Determine the Ideal Marketing Budget for a Small Business
Many small business owners struggle to determine how much they should spend on marketing. Knowing how much money needs to be dedicated to marketing is hugely important because marketing is one of the most critical aspects of business and a business budget. Marketing success is inherently tied to business success.
Hopefully your business has a budget, and hopefully marketing is already a part of that budget. If not, that’s OK too. We’ve got plenty of information on how to determine what aspects of your business constitute marketing and how much money should be spent on maintaining or improving those areas of your business.
The hard part about determining your ideal marketing budget is the shear number of variables that play a role in this calculation. The range is so wide, that anywhere from 0% to 50% of your actual or forecasted revenue may be appropriate depending on your goals.
For most profitable small business owners, you will be closer to 5% to 20% of your annual revenue. That is still a pretty wide range. Let’s dig a little deeper into how to find the ideal marketing budget for the specific situation of your small business.
Why Spend Anything on Marketing?
Before determining the ideal amount to budget for marketing, we should first dissect if spending any money at all on marketing is wise. Some business owners think they need to minimize or eliminate as many expenses as possible to maximize their profit. Are they right or is the old adage, “you’ve got to spend money to make money” more correct?
The reality is that if you’re in business, you are already spending money, directly or indirectly, on marketing efforts. And that is because marketing in inherent to business. If you own or run a business, you are spending money on marketing.
If you think you’re not spending money on marketing, you should consider that the definition of marketing is very wide and broad. Every business needs customers, and anything you do to acquire or retain customers falls within marketing.
Listen and Learn on the Kickin’ it with Kapok Podcast
In the episode “What is Marketing and Why Does it Matter to a Small Business?” we explain how all businesses engage in marketing by virtue of being in business. Learn the benefits of turning off your marketing auto-pilot.
Even if you are not spending actual cash money, you may be spending your time and energy on marketing efforts. This is not a bad thing necessarily, but you should also consider the opportunity cost of spending your own time on certain marketing tasks. If you truly are the best or only person for the job, you certainly should do it.
Some business owners can take this way too far. And they will even spend time researching intricate details of marketing execution just to avoid paying an employee or a marketing agency any money at all. This is often very short-sighted because they spend countless hours becoming an expert at some aspect of marketing they will only use once or twice a year.
If you can find an employee, freelancer, or agency to get the same work done at a reasonable price, you should seriously consider taking advantage of that opportunity. It will allow you to focus your efforts on the aspects of the business that need your attention the most and that you are actually great at doing.
For example, if you are the owner and executive chef of a restaurant, your time may be better spent refining your menu or sourcing fresh seafood versus learning how to pitch a press release to a reporter or taking photography lessons to get the perfect picture for your Instagram account.
How Much Should You Spend on Marketing?
You know your business needs marketing, but you’re unsure how much to spend. Or maybe you are curious how much marketing costs, to see if it’s something you can afford. The good news is that every business can afford marketing.
That’s because, as discussed above, every business is already spending on marketing either through real money or sweat equity. The amount you spend and the success you see from marketing really depends on your perspective towards marketing. There tends to be two general camps of business owners when it comes to determining what amount to allocate for marketing within a budget for a small business:
1. Owners Who Think Marketing is a Waste of Time and Money
The first group of owners think of marketing as a waste of money for the most part. They try to avoid what they perceive as external marketing expenses whenever possible. They rely heavily on their own personal marketing efforts, but usually don’t even realize or want to acknowledge that they are engaged in marketing. They may make incidental marketing purchases from a salesperson who calls them because they feel like a good idea at the time. But they don’t really track how their marketing efforts impact their business.
Since these owners aren’t making a real investment in marketing and aren’t tracking what marketing they do pay for, their self-fulfilling prophecy is continually reaffirmed. These owners get stuck on the idea that their limited efforts are yielding minimal results. Why would they spend more money on bigger marketing endeavors if their small scale efforts are failing?
The answer is that they won’t until they realize the trap they have fallen into. To paraphrase Benjamin Franklin, they have failed to plan, and thus are planning to fail. They will continue down this path until they realize that marketing is an integral and strategic part of business. Marketing is not a yes or no choice for a business. And pretending marketing doesn’t exist within their business and letting it run on autopilot doesn’t change the reality of the situation for them.
The irony is that when you look at the big picture these owners are often spending the most and getting the least. The money they spend on external marketing goes untracked. They forgo improving other aspects of their business because they are spending their own personal time on marketing efforts.
Unfortunately for this group of owners, they cannot determine their ideal marketing budget yet. They usually first need to determine a business plan, and then figure how marketing as a business concept can help them with that plan. They also need to honestly consider what role they should personally play in their marketing efforts. Only then can they determine what their ideal budget should be for marketing.
2. Owners Who Treat Marketing as a Key Part of Running a Business
If you are in this group of business owners, you realize that marketing is a complex set of activities that requires strategic planning, creative implementation, and solid execution. You know that your business needs customers and therefore you are engaged in marketing by virtue of being in business. You personally have a strong marketing background or rely on people who do.
You know that you may be good at certain aspects of marketing. You also know that a strong internal team or third-party marketing experts can help with your marketing efforts. You work with people to help you strategize and execute tasks that would require too much of your time or are outside your wheelhouse.
You or someone you trust is constantly tracking, testing, and iterating new marketing campaigns. Your team carefully thinks about each marketing campaign before you spend money on it. You consider how it will help your business by acquiring new customers, maintaining existing customers, or increasing the profitability of your customers.
As an owner in this group, you probably already realize that since marketing drives customers and revenue, your marketing expense will often be budgeted as a percentage of your revenue. So what percentage of revenue is ideal for a small business?
The Ideal Marketing Budget as a Percentage of Revenue
As we mentioned earlier, most successful businesses end up spending between 5 and 20% of their annual revenue on marketing. The average among all businesses was 6.9% in 2017 according to research by CMO Survey. They reported that this was down slightly from 7.5% in 2016.
Of course your business, like most, is not that average business. The size of your business can play a large role in your marketing budget. For example, another study by Gartner in 2016 found the average business spent around 12% of their revenue on marketing, but for smaller businesses it was closer to 10%.
Beyond size, the ideal percentage will also vary a lot depending on the age of your business, your desired growth rate, and the competitiveness of the industry and region you operate within.
Age of Your Business
If you are a new business, or a business making big changes, you should be spending a higher percentage of your forecasted revenues on marketing. Many businesses spend 20% or more of their first year’s revenues on marketing. The reason is twofold. First, you’re business is new, so few people know about you or your product. You need to spend money educating the public.
Secondly, since you are new, your revenues are likely to be weak compared to other businesses in the same industry. Consider a scenario where you and your competitor are both spending 10% of your forecasted revenue on marketing, but your competitor, who has been in business for 10 years, has five times the amount of forecasted revenue as your brand new business. This will make it much more difficult for you to get any sort of meaningful foothold.
Desired Growth Rate
You also must consider how fast you want to grow your business. If you want to grow your existing business faster than you have in the past, you’ll likely need to spend a greater percentage of revenue than you have in the past. You are giving up potential profit now to spend on marketing, and planning to have that return you even more profit down the road.
Let’s say your business has had a compound annual growth rate (CAGR) of 8% over the past five years while spending an average of 10% of your revenues on marketing. If you want to grow faster than 8% CAGR you will need to spend more money on marketing or somehow make your marketing more efficient. There is really no other way to increase your growth rate.
Competitiveness, Industry and Region
Certain industries and certain regions are just more cutthroat than others. Generally, the more money there is an industry or a region the more competitive it will be and the more money will need to be spend on marketing.
For example, the study by Gartner reported that the education industry averaged 18.5%, while consumer packaged goods (CPG), like clothing and household products, averaged 11.0%. Meanwhile, the National Restaurant Association recommends that restaurant owners spend 3% of their revenue of marketing, while other critics argue the correct amount is anywhere from 0% to 6%.
In lucrative and competitive industries, big money will often move in and spend vast amounts of money on marketing to take over and cement themselves in certain industries and regions. Take this story from Recode about how Amazon rose to dominance. Amazon spent almost 20 years as an unprofitable/low-profit company, spending nearly all of their money to overtake competition like Walmart.
It’s unlikely you’ll need to compete directly with Amazon as a local business. But you do need to keep track of your competition and adjust your marketing efforts accordingly. If your competitors appear to be spending more money than they have before, and begin to gain market share, how will you handle that situation?
There is No Universal Ideal Marketing Budget
Just like there is no secret ingredient in life, there is no perfect marketing budget. Starting around the widely reported averages of 5 – 15% is a great start. But knowing all the averages and ranges is only the beginning for your business to find its ideal marketing budget.
You really need to know your business and the market, and then decide how important all of these factors are for your goals. You and your team may also find more efficient marketing techniques, and you may be able to spend less on marketing and get the same results.