How Much Should Small Businesses Spend on Marketing?

Determining the right marketing budget is cumbersome for any business. Startup companies and small businesses especially, must maintain a healthy balance of revenue to costs while still investing resources to market and grow. The big question for any small business is then: how much budget should be set aside for marketing?

The U.S. Small Business Administration recommends, “As a general rule, small businesses with revenues less than $5 million should allocate 7-8 percent of their revenues to marketing.” This percentage is based on companies that have margins in the 10-12 percent range (after expenses).

Of course, there are many other factors to consider when determining a budget such as the type of industry, size of business, growth stage, etc. For example, businesses that are just getting their feet off the ground and are focused on brand building might spend up to 20 percent of sales on marketing, a much higher percentage than established companies might use.

Regardless of how much budget is set aside for marketing, all businesses can benefit from a system of checkpoints to make sure marketing budgets are being used to their fullest potential. Here are a few ways to curb wasted marketing spend:

• Have a competent marketing plan. Outline costs and plan how you are going to achieve goals within a reasonable time frame. For help on creating a plan, check out Does Your Business Have a Marketing Plan? or How to Set a Marketing Budget that Fits your Business Goals and Provides a High Return on Investment.
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• Track return on investment (ROI). Measure your spending and the current effectiveness of all your activities. Tools such as Google Analytics and call tracking can help, but even simple spreadsheets or pen & paper are better than nothing. If one quarter was more profitable than another, investigate why. Simply put, basic tracking empowers you to do more of what works and less of what doesn’t.

• Revisit your plans. Recognize that the original marketing plan you created is flexible and can be adjusted as necessary. Remind yourself of your goals and evaluate your performance throughout the year. There is no guarantee that your original plan will be successful, but as long as you know whether your spending is actually achieving your marketing goals and you are willing to make the appropriate changes, you are on the right track.

Another way to think about your marketing budget is to frame it in relation to the revenue growth you’re aiming to achieve via your marketing efforts.

As Dan Tyre, HubSpot Sales Director says:

“A lot of the traditional marketing spend has migrated on line because of recent world events. Rather than identifying a % of revenue for marketing spend, I like to think of combining sales & marketing and focus on growth spend. What % of net new revenue (that is prospects who are finding you on the web – that have never worked with you before) would you spend? There are three keys to this process.

1. You have to start with SOMETHING

2. You need to measure everything on the website to conversions to sales connection to closed deals
(we call that ratios)

3. You need an easy to use martech stack to manage it all. In 2020, every company has to be a tech company. This is the first time in history that all size companies can compete”

For an additional resource on marketing and budget management, I recommend How to Give Your Business an Extreme Marketing Makeover written by a friend of CommonMind, Gil Effron.