Setting A Small Business Advertising & Marketing Budget: A How-To

Setting A Small Business Advertising & Marketing Budget: A How-To

September 27, 2021
(Reading time: 7 - 14 minutes)

As the weather starts to turn cooler and we enter into the fourth quarter of the year, many businesses start discussing budgets. Choosing the right marketing budget is difficult for any small business. Small businesses, in particular, must maintain a good balance of revenue to costs while spending resources to advertise, market, and grow the business. Then the ultimate question comes up of how much should I be spending on advertising and marketing and where.

To answer these questions, let first look at where the numbers of larger businesses are doing.

Where Should You Spend Your Marketing Budget 

Let me first say that not everything a big business can do a small business can do. And by that I mean, they have much larger coffers and much larger budgets with which to test and measure their digital marketing strategies. Therefore, let’s use this to our advantage and let them test the waters, then we can follow suit with what is working.

Here are some of the key statistics taken from Forrester Research and eMarketer reports about the estimated allocation of marketing budgets spent offline vs. online and across digital platforms:

  • In 2021, the average business was expected to allocate half of their total marketing budget to online.
  • Search Engine Marketing (SEM) will capture the largest share of online spend with online display (banner ads, online video, etc.), taking the second-largest share.
  • Online video will represent the highest growth category, with the anticipated investment more than doubling 2016 numbers by 2021.
  • Mobile marketing has grown to the point that it’s no longer tracked separately in the forecast, and it’s presumed to be considered across all channels.
  • Digital marketing is pacing at an 11% compound annual growth rate between 2016 and 2021, with the biggest growth occurring in online video.
  • Investment in paid search, display advertising, social media advertising, online video advertising, and email marketing is predicted to account for 46% of all advertising by 2021. 

What Marketing Strategies and Tactics Produce the Best Results?

GetResponse produced a survey entitled Email marketing & beyond: global industry benchmarks 2017. They surveyed 2,500 digital marketers, of which the respondents reported on what marketing activities generated the best ROI for them. While this survey is from 2017, many of the channels have continued to show similar trends.

Marketing Channel ROI Rating Across Industries - Get Response

 

Email marketing continues to be one of the most effective, with the largest percentage of Excellent and Good ROI outcomes recorded, with content marketing, search engine optimization, and social media close behind.

Changes in Traditional Versus Digital Marketing Spend

Growth in Digital Marketing Spend Greatly Outpaces Traditional Advertising - CMO Report - Feb 2020

This chart from the CMOsurvey.org February 2020 report shows the stark disparity between digital growth and offline declines.

For approximately the past five years, traditional advertising spending has steadily declined by single-digit percentages each year. In contrast, digital marketing spend has steadily increased by double digits year after year.

What does this mean? Simply that businesses are changing their marketing budgets. Budgets previously spent on radio, television, and newspapers are now spent on search, email, and social media. This tendency is anticipated to continue for the foreseeable future.

For example, just a few years ago, digital media topped the TV advertising juggernaut in terms of spending. This disparity has steadily widened as of 2019, and digital ad expenditure surpassed all conventional media ad spending combined for the first time. 

When the eMarketer report was initially published, they predicted that by 2021 digital spending would be more than double television spending. Now here in lies point, if you're not spending considerably on digital marketing, you're falling behind your rivals and passing up a tremendous chance to reach out to prospects and clients.

Of course, the upheaval of 2020 and the Global Pandemic did not leave much undisturbed; thus, eMarketer issued a report in October 2020 with revisions to the projection for digital ad expenditure. They predict that by 2024 US-based digital spending will be in excess of 242 billion dollars, up from 228 billion in their March 2020 report.

Now I will be the first to admit that I am somewhat biased toward digital marketing. However, the numbers don’t lie. We are very much in a world where you are left behind if you are not marketing primarily online.

How Much Should a Small Business Budget for Advertising and Marketing?

The U.S. Small Business Administration (SBA) 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).

However, that SBA article is a little out of date, from 2013, to be exact. While there is no one-size-fits-all number for setting your marketing and advertising budget, here are some suggestions from fellow small business owners, executives, and marketing professionals.

 

A lot of the traditional marketing spend has migrated online because of recent world events. Rather than identifying a percentage of revenue for marketing spend, I like to think of combining sales & marketing (smarketing) and focus on growth spend. What percentage 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.
Dan Tyre, HubSpot Sales Director

 

 

The general rule is about 7% of your revenue should go on advertising. You have to get into the mindset that advertising is bringing you in revenue, so the money is not lost.

– Trond Nyland, Cordless Drill Guide

 

 

Every small business is different, but as a rule of thumb, I’d encourage small business owners to spend around 10% of their sales/revenue on advertising and marketing … small businesses should not think of their marketing/advertising spend as a cost – they should consider it an investment.

– Tom Dempster, True Boost Digital, LLC

 

 

With competition stronger than ever until you can establish your brand in your niche, you really need to draw attention to your company through paid acquisition. I would suggest allocating 15%-20% of revenues to marketing, and more if your margins can handle it.

Of this ad spend, I would suggest it be split across social media, Google Ads, trade publications, and content marketing to generate more organic search results. The percentage of your marketing budget dedicated to any one of these channels will again depend on your company, space, and a host of other factors.

– John Ross, Test Prep Insight

 

As you can see, there is no hard and fast rule that small businesses should follow when setting their marketing budgets. After all, your business's advertising budget is unique. How much you should spend depends on your specific business and industry and a few other factors: 

  • Revenue generated by the business
  • Business stage
  • Your size
  • How aggressive do you want to be to grow
  • Target clients buying behavior
  • Marketing channels
  • Advertising methods 

Typical Advertising and Marketing Costs for Small Business 

For every business, advertising and marketing are essential to profitability and growth. Yet, according to the SBA, many small businesses spend their marketing dollars haphazardly or don’t allocate enough money to marketing. I don’t know what is worse.

Unfortunately, many small businesses consider marketing to be an expense rather than an investment, and they set aside funds to keep expenses low. However, marketing is not an expenditure. It is a vital investment in increasing your revenue and growing your business. By reducing expenditures here frequently means you are shortchanging yourself in the long run.

Let's look at an example business:

Walk This Way Dog Walking had gross revenue of $120,000 in 2021 if they assign 10% of that to their marketing, $12,000 or $1,000 per month. That would not be a bad budget if they were focusing on content marketing.

Your Turn:

The first step is to determine your gross annual income. If you are just starting or your income varies considerably, you should review your revenue regularly, possibly quarterly or even monthly.

How to Create an Advertising and Marketing Budget in 7 Steps

A well-thought-out strategy is the greatest method to ensure that you are spending your hard-earned dollars appropriately. This starts with a marketing strategy. You have to know what you intend to spend your budget on, the return on investment (ROI) you anticipate, and how you intend to measure the success of your efforts.

In the following sections, we'll go through how to create a budget and figure out how much money your small business should spend on advertising and marketing. 

1. Get to Know Your Clients

For your small business, you must first choose which channels to use to attract potential clients before developing a marketing budget. This requires a deep dive into your ideal buyer, also known as a buyer persona. You can learn more about buyer personas here and download a free buyer persona guide.

Once you understand your potential clients, you can figure out how to best guide them through the sales funnel.

Marketing and Sales Funnel - Then and Now

Building a successful marketing budget requires a comprehensive review of your sales funnel, in which you will track results from prospect to client.

Here are the minimum sales funnel data points you will need to look at in order to get a good grasp on your advertising and marketing needs:

  • How many site visits do you get per month?
  • How many leads are being generated per month
  • How many leads are sales qualified leads (SQLs)
  • What is the cost to generate SQLs
  • How many leads converted into opportunities
  • How many of those opportunities close as new deals
  • What is the average value/revenue for a new deal

Obtaining this information from digital sources, such as your Google Analytics for site visits and your marketing automation platform or customer relationship management (CRM) software for the rest, will help to simplify the process.

2. Research How Your Competition is Advertising and Marketing

To create an effective marketing budget, you must first evaluate your competition. Examining your competitors' marketing might give you a better sense of how much and where you should spend your dollars.

A competitive study will help to provide insight into the marketing channels that your main competitors are using and how they are performing. You'll also get a sense of what's working and what isn't. This can provide you with information on advertising and marketing strategies to emulate and those to enhance.

3. Measure What Matters and Base Your Budget on Revenue

Many small businesses allocate a percentage of their actual or expected gross revenues to marketing. Therefore, you will need to attribute revenue to your marketing investments. Else you can’t evaluate the effectiveness of your advertising or marketing campaigns.

You must also allocate income to your marketing initiatives. You can't assess the efficacy of your advertising or marketing initiatives until you have that; you also can't make good decisions about whether to devote (or continue to devote) cash to specific marketing activities.

4. Spend Your Budget Wisely

It is crucial to understand how much money you have to spend on advertising and marketing, but even more important is understanding exactly how to spend those dollars. To do so, you must first determine the cost of the various marketing outlets and tools you will need.

Some marketing resources are available at no cost. However, even free services have a cost, and they may eventually need to be upgraded to a higher functioning platform, which will come with a cost. Therefore look at the costs once you need to step up before investing in a platform only to realize you need something better later.

Small businesses may also pursue advertising on digital platforms like Facebook and Google Ads. In most cases, with Facebook, we recommend it for small businesses with a large clientele with which one can build a lookalike audience. Google Ads may be better suited to small businesses as you can change your campaign budget on the fly to fit within your budget.

Nearly all small businesses need to determine whether to outsource their marketing efforts or delegate them internally. This will depend on the amount of staff and time you have available, not to mention the expertise and knowledge on how to do the marketing activities in question.

5. Set Growth Goals

The next stage is to establish your growth goals. These goals might be as basic as increasing the overall number of sales-qualified leads generated by your Facebook page or increasing conversions on your landing pages.

6. Review and Finalize Your Marketing Budget

After you've defined your goals, look at prior years' marketing budgets, if applicable.

Though the pandemic has altered how much small businesses advertise, market, and spend, examining past years' marketing expenditures and how they affected sales might give insight into where you may have previously over or underestimated your business's promotional needs.

Consider new trends in your sector, the market as a whole, and how your requirements have changed. Once you've established a budget, make it a habit to evaluate your marketing efforts on a regular basis and move resources as needed to adapt to what's working and what's not.

7. Test, revise, and revise again

Remember that it doesn’t have to be set in stone after you've created a marketing strategy and budget. There may be instances when you need to alter things up, such as launching a different campaign.

Knowing if your spending is truly working in meeting your advertising and marketing objectives is more important than sticking rigidly to your budget. After all, there is no such thing as a set marketing budget. A small firm can experiment with new areas and outlets, such as social media advertising, and evaluate the results.

For example, I would care to bet that no one saw the global pandemic coming or the impact that it would have on the world. Regardless of that, it has been proven time and time again that you shouldn’t abandon your marketing based on a recession or a global pandemic. We have seen those who continued or ramped up their marketing efforts are in much better shape than their competitors.

The goal is to keep track and monitor your marketing efforts constantly. If a platform or method provides the necessary ROI, then, by all means, continue to invest the same amount or even raise it if you are able. If it is producing poor results, try reducing or removing it. 

However, some aspects of your marketing plan, like content marketing, doesn’t produce the fast ROI that other methods will. I say this to say, don’t stop because you don’t think it's working after a few months. Content marketing takes time! We also suggest using a product such as HubSpot to track what your content marketing is working on and what isn’t.

Where Can You Find Free Marketing Budget Templates?

Where Can You Find Free Marketing Budget Templates?

If you need help creating a marketing budget for your small business? Try these downloadable, free marketing budget templates.

Final Thoughts

In this post, we have covered a lot of ground, from where to spend your money, how much you should spend, how to create a budget, and where to find free templates. Now it is your turn to take advantage of these resources and create your small business marketing budget. It will be nearly impossible to grow your business without advertising and marketing. A good budget can assist you in spending wisely as you grow.

Once you have a budget in place and need help implementing an effective digital marketing strategy, reach out to us for a free consultation. We will be glad to see if we are a good fit for your business.

Chad Treadway

Written by:  |  September 27, 2021

Chad is our business development manager. He will help you survey your business needs, ensuring you are educated on your options before suggesting any solution. Chad also has several certifications through HubSpot to better assist you with your internet and inbound marketing.

See Chad Treadway's' bio: cubecreative.design/about/chad-treadway