What should I spend on marketing?
Budgeting is one of the most time-consuming parts of owning a business. “Did I spend enough here last year?” “What would happen if I put more money towards . . . ?” “Do we really need health care insurance?”.
These dilemmas usually bring me to the question I get asked most often.“What percentage of my revenue should I spend on marketing?”. I am not entirely convinced people really want to know the answer. At times, I think they are just making polite conversation.
But, if you truly are interested, here are a few things to say on the matter.
Set aside a specific percentage of your revenue. The percentage should be based on these factors:
- Type of business. If you market to the public, you’re going to have to spend more than if you market business-to-business (B2B). Content creation for web, social media, radio, and online ads can be expensive and time consuming however, it’s often vital for the ongoing profitability of a retail store or local service provider. While the actual percentage will vary among businesses, it’s common for a new or growing company to spend 10 to 15 percent of the year’s anticipated revenue on advertising.
B2B advertising is usually more targeted than business-to-consumer advertising and can make use of direct phone calls, highly targeted emails and direct mail pieces. In either case, it’s important to experiment with the percentage you allocate to advertising. If you’re spending 10 percent now and find upping that to 20 percent increases your revenue by 25 percent, you’ve come out ahead.
“The U.S. Small Business Administration recommends spending 7 to 8 percent of your gross revenue for marketing and advertising if you’re doing less than $5 million a year in sales and your net profit margin—after all expenses—is in the 10 percent to 12 percent range.” 2
- Location. If you are located in an area that is frequented by the kind of people that fit your customer profile, you may be able to reduce your percentage significantly. If you are off the beaten path, you probably need to hold to the 10 to 15 percent.
- Competition. If you want to take market share away from your competion, you need to spend a higher percentage than them. This is especially true when your competition has become complacent. Become aggressive with your advertising dollars. You may see results in a relatively short period of time. This is especially true in areas of high population growth.
What should I count as marketing spend?
- pay-per-click spend
- display ad clicks
- media spend
- content production costs
- outside marketing and advertising agency fees
- What you can afford. A small company should not spend more on advertising than its profits demand. But in certain instances (such as when an aggressive new competitor is taking business from you), you may have to temporarily increase the percentage just to stay afloat. This could mean borrowing, taking money out of savings, or allocating more for marketing and less for other areas of operation.
“Marketing budgets as a % of overall firm budgets have been fairly consistent for B2B firms the past few years, in the 9-11% range, but are expected to increase in the next 12 months for B2C companies, up to as much as 16%.” 3
At the end of the day, you should be able to answer the question. “What percentage of your revenues do you spend on advertising?” The answer may be different for every business owner.
But you do need to have an answer.