If you are reading this article, then certainly this same question has crossed your mind. Rest easy, you are in good company. This is a question we hear quite often. So often in fact that we decided to put pen to paper (figuratively) and write this short article.
Determining how much to spend on advertising and marketing one's business doesn't have to be difficult or complicated. To the contrary, it is simple enough. However, there is no "one size fits all" answer. At the risk of sounding hackneyed, the short answer is, it depends. If you are satisfied with that answer, great! If not, let me explain and read on.
So, as we've mentioned, one of the most significant questions brought to light during our conversations with existing and prospective clients, besides where best to spend advertising and marketing dollars, is how much should one spend? I prefer the word invest over spend, because I firmly believe money, when spent on the right marketing and advertising initiatives, will improve a business bottom line by attracting the right customer and building brand loyalty which in turn builds brand equity. In that light, it really is an investment in the growth of your business.
Building brand equity is an investment in your business
So getting back to the question of how much. While there is no definitive answer as to how much any business should spend on marketing, there are general guidelines. 2 to 3% of revenue I hear floated about most often. While I do not necessarily disagree with those figures, there are a lot of factors that will determine what is appropriate. For instance: the type of business (manufacturing, retail, service, etc); is it an established business or a start-up; is the business built to leverage volume or to leverage margin; and so on.
The range can be broad and can vary by business from as little as 0.3% up to as much as 20% of revenue when warranted such as for example in the early brand building stages of a company. Regardless of what other business might be doing, the important thing for you to remember is to intentionally and deliberately set aside some rational percentage of your sales to get your business out there in front of your preferred customer base. Once you commit to do that, you no longer have to ask yourself "How much should I spend?" but rather the question becomes, "How do I spend most effectively?".
Set aside some rational percentage of your sales
Take for example a restaurant business that is just starting off. After consideration of such factors as budget, growth stage, market location, competition, outcome goals, I might suggest to the client beginning with a budget of 15% of gross projected revenue for the first 9 months, beginning 3 months in advance of opening to build awareness. Later on, after doors open and as the restaurant's marketing campaign progresses, typically on a quarterly basis, we, and likewise you, will be able to determine not only if the starting percentage allocation should be decreased or increased based on the campaign's ROI data but also the areas that are more effective, if additional expenditure in those promising areas are justified, if low performing areas should be cut entirely or if the entire campaign needs to recrafted. Do understand that effective marketing is a moving target, but with patience, planning, and consistency, can provide good outcomes. Anyone that tells you or implies otherwise is leading you down the garden path, so to speak. Off my soap box now and moving on...
Effective marketing is a moving target
We all have the best of intentions in marketing and advertising our business, especially when starting out. While a successful marketing strategy is obviously important and is what we are all striving for, consistency of marketing presence is equally important.
Consistency of marketing presence is important
Let me also add that the measure of success of any campaign, without exception based on my experiences, is determined not necessarily by the results but by your expectations. On that matter, they need to be reasonable and grounded in reality. If they are not, then your campaign will always be destined for failure.
There is no magic bullet. No quick fix. Any campaign that is embarked upon and found to be successful needs to be maintained. This is consistency of presence. It goes a long way toward building brand equity. Your client base will decline at about 10% annually for any number of reasons, that's a given, unless you take measured steps through your marketing and advertising efforts to prevent that. To prosper, especially in a down economy, it is absolutely necessary to maintain a high profile in your particular community. That requires you to invest consistently in sound marketing and advertising campaigns for your business.
Your client base will decline about 10% annually
So how to spend most effectively? Well, if starting from zero, as in our restaurant example, we should be calculated but aggressive in our approach. We shall talk more on this in a future article but briefly, yes, budget is a big consideration. However, there are a number of things that a new restaurant can do internally on a continual basis to develop and maintain a customer base that does not cost a whole lot to action, either in dollars or effort. One idea that works well, if approached correctly and consistently, is an incentivised “lead capture” using a “comment/club card” that could be handed out with the check presenter. Such permission based opt-ins can be used for email campaigns and promotions. With the pervasiveness of smartphones, a mobile opt-in or mobile customer loyalty program should also be given strong consideration. It is extremely cost effective and is one of the best brand-in-the-hand marketing mediums available today. It is also grossly under utilized in my opinion. Traditional marketing efforts, more commonly referred today as off-line marketing, such as direct mail, whether solo or cooperative, can be more expensive up front, but is also money very well spent when done correctly. When also combined with mobile, whether landing page using a QR code or shortcode to an offer, or other form of interaction, it can make traditional campaigns extremely effective and very measurable. There's also social media marketing, PPC, retargeting, event marketing — all when used in combination with other mediums can pay dividends, but again only if there is consistency and a realistic expectation of what is a good outcome.
How do I spend most effectively?
So to recap and wrap up, here is a quick summary that can help you to decide how much money you should allocate to marketing and how you can spend it wisely.
How to Calculate your Marketing Budget
As was said earlier, many businesses allocate a percentage of actual or projected gross revenues. This is typically between 2 to 3 percent for run-rate marketing and up to 3 to 5 percent for start-up marketing.
Allocation also depends on several factors such as the industry you are in, the size of your business, and its growth stage.
Allocation depends on several factors
Retail businesses, for example, during the early brand building years spend much more than other businesses on marketing – up to 20 percent of sales.
As a general rule, small businesses with revenues less than $5 million should allocate 7 to 8 percent of their revenues to marketing.
This budget should be split between:
brand development costs (which includes all the channels you use to promote your brand such as your website, blogs, sales collateral, etc.); and
the costs of promoting your business (campaigns, advertising, events, etc.).
This percentage also assumes you have margins in the range of 10 to 12 percent (after you’ve covered your other expenses, including marketing). If your margins are lower than this, then you might consider eating more of the costs of doing business by lowering your overall margins and allocating additional spending to marketing. It’s a tough call, but your marketing budget should never be based on just what’s left over once all your other business expenses are covered.
Spending Your Budget Wisely
Knowing how much you have to spend on marketing is critical. Even more critical is how you spend it.
This means having a plan. Your small business marketing budget should be a component of your marketing plan, outlining the costs of how you are going to achieve your marketing goals within a certain timeframe.
Your marketing budget should be a component of your marketing plan
Revisit Your Plans Often and Track ROI
Once you have developed your marketing plan and budget, remember that it needn't be fixed and inflexible. There may be times when you need to throw in another unplanned campaign or event. At the end of the day, knowing whether your spending is actually helping you achieve your marketing goals is more important than sticking to your budget.
Have a plan in place for measuring your spending and the impact that activities have on your bottom line. Compare tactics, analyze seasonal effects – was one quarter more profitable than another? Why? Above all, have patience and follow through on all your marketing efforts across the organization – it takes a village to build and grow a brand.
Some tactics are hard to measure, like the efficacy of print collateral, but you need to consider the impact of not having these branding staples in your tool kit before you reign in your graphic design and print funds.
Marketing plans should be maintained on an annual basis at a minimum, and revisited if you launch a new product/service, or if the market landscape changes.