Jump to Main Content
USA flagAn Official Website of the United States Government
Managing a Business

Blogs.Managing a Business

Register

How to Set a Marketing Budget that Fits your Business Goals and Provides a High Return on Investment

Comment Count:
12

Comments welcome on this page. See Rules of Conduct.

How to Set a Marketing Budget that Fits your Business Goals and Provides a High Return on Investment

By Caron_Beesley, Contributor
Published: June 4, 2012 Updated: January 9, 2013

Whether you run a small business or a multi-million dollar corporation, marketing is essential to your profitability and growth. Yet many small businesses don’t allocate enough money to marketing or, worse, spend it haphazardly.

I recently got to know a business that was investing heavily in developing a hip, niche product to add to its already very cool product line. Seemed like a sure winner. However, it quickly became apparent that product development had occurred in a silo, while sales and marketing were off doing their own thing. The result? The week before launch, the business found itself with a fantastic product on its hands, but lacked a go-to-market plan or promotional material for the new product. 

In a panic, an expensive PR firm, social media strategist, and marketing consultant were all pulled in to help drive awareness of the new product. Within a few weeks, the budget had run dry and the business had to quickly revisit its overall operational and sales and marketing strategy, while moving forward on a shoestring.

Products and services don’t sell themselves. By ignoring marketing until it’s too late, many small businesses risk hitting a brick wall and, quite possibly, failing. A hip and trendy product line shouldn’t rely solely on ongoing product investment and word of mouth.

But how much money should you allocate to marketing? And how can you spend it wisely? Here are some tips that can help you do both:

How to Calculate your Marketing Budget

Many businesses allocate a percentage of actual or projected gross revenues – usually between 2-3 percent for run-rate marketing and up to 3-5 percent for start-up marketing. But the allocation actually depends on several factors: the industry you’re in, the size of your business, and its growth stage. For example, during the early brand building years retail businesses 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 7-8 percent of their revenues to marketing. This budget should be split between 1) brand development costs (which includes all the channels you use to promote your brand such as your website, blogs, sales collateral, etc.), and 2) the costs of promoting your business (campaigns, advertising, events, etc.).

This percentage also assumes you have margins in the range of 10-12 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.

To get a sense of what your plan should include, take a look at this article from SBA guest blogger, Rieva Lesonsky: Does Your Business Have a Marketing Plan? Also check out How to Cut Your Marketing Budget and Build Your Brand Profitably.

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 it 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.

Helpful Resources

 

About the Author:

Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Comments:

I was the Chief Marketing Officer of a company with a $25 million budget of which about 20% went to search (Google, Yahoo, Bing). I wish I could have dedicated a 100% to search. Unfortunately, the opportunity size and the way bidding works was not conducive to this. However, the point that I making is that your ROI is going to be very different for advertising venues. If you are getting (and can measure) a strong ROI, don't be afraid to commit your entire budget to one medium.
Those are nice pointers. I also suggest getting advice from market researchers because they can help in defining the perfect marketing budget based on real research and analysis.
There are plenty of sources out there to see what percentage of revenues should be spent on marketing per industry but we have always given a little different advice to clients. While that information is valuable and gives you a starting point, its also important to analyze the competition on your target markets to determine what they are spending annually on marketing and what market share they currently have. If the industry as a whole is spending roughly 8% on marketing and your top two competitors have 80% combined market share, then your 8% isn't going to do too much. I also think small businesses can get caught up in creative as well. It is important to have great creative, but don't spend 50% of your marketing budget to create a commercial and then have practically nothing left to run an effective campaign.
Yes, I would like to know where the 7-8% number comes from. Also would like to know why there is no response to Mr. Wechner's question. Doesn't the system alert the writer to a post? IMO, there are a couple of issues that should be further addressed: size of business and cost of customer relations. If they are solo entrepreneurs and are doing less than $250K I recommend 20% to marketing, but I am including customer relations as part of that allocation. Bearing in mind that many businesses get most new customers from referrals, this is a "marketing" source neglected by practically everybody I know, relative to what can be done. It's an area I have recently started to focus on, especially with the use of social media and tech automation.
A useful article, but when you write: As a general rule, small businesses with revenues less than $5 million should allocate 7-8 percent of their revenues to marketing. On what is that general rule based? I mean seriously, I'm not going to score 7-8 percent on marketing from my board by saying, with all due respect, "Caron Beesley said so". Is there any industry research or credible source that can substantiate this rule of thumb? I see it mentioned here: http://goo.gl/wW7Nm as well, but also without citations and without and credible source, just heresay, and advice (in this case from FrogDog without even an identified author). I would, sitting on a board or upper management of any business question the sensibility of anyone who came to me cap in hand for marketing budget on that basis - "FrogDog said so". Surely if you're advising this, you have some reason to do so, other than heresay.
Thanks so much, Ms. Beeseley, for sharing this valuable information, for making all of your articles quick and easy to digest and for providing links to valuable information. Also, I noticed you go back and update articles to make them relevant to any recent change. There is lots for me to learn - being an engineer jumping into the business world - and I appreciate you and SBA providing these resources.
Marketing in today's world is extremely important. Thanks for all the great tips!
Thanks for all your great ideas about marketing plans.
So I'm the author of QuickBooks for Dummies... and I have a QuickBooks tip related to your point on tracking ROI: Accounting programs like QuickBooks typically have a 'customer type" field the software will collect and store. People often just ignore field, but if a business owner compulsively asks new customers where they learned about the business--website, referral, newspaper ad, yellow pages, direct mail flier, etc--one can sometimes gain seriously interesting insights into the effectiveness of one's various marketing gambits. Oh-oh, sorry for the ramble. I really started this comment as a way to underline Caron's excellent point about needing to track the ROI and how that can let you make better decisions. Thanks Caron!
Thanks for all your great ideas about marketing plans. Please keep on sharing your ideas with the world. And, as the middle of the year quickly approaches, if you are a business owner, you're well into your 2012 marketing plann, or at least getting some of your marketing ideas done. Believe me, if you look at other business owners who are successful, most all of them are successful because of their marketing plans. Besides, planning you're marketing strategies and putting them in a calendar before the new year starts is especially important to your business's success. Because, when you can create a marketing plan & calendar, you will have a game plan to follow right from the beginning of the year, and you are much less likely to be trying to come up with marketing tactics at the last minute. For example: If you've ever had an ad rep come to you looking for your Black Friday ad two weeks prior to Black Friday, and you have to quickly slap something together just to make the deadline, then you know what a pain it is not having your marketing plans laid out beforehand. It turns out, if you lay out your marketing plan and note all the reasons why you want to promote your business as well as the deadlines for each scheduled item, you can add work schedules to your marketing calendar to make sure the proper amount of time goes into preparing your marketing promotions. In truth, when preparing your marketing budget and it's not factored into your plan, typically many or your preparations are hurried and your marketing campaigns can't do the best job of getting your message out. Moreover, by budgeting and planning your marketing strategies it will be much easier for you to budget your marketing expenses for the year. Remember, when you know what marketing tactics you will be using, you can come up with realistic ideas of how much each promotion will cost your business. This allows you to set aside an appropriate marketing budget to cover the costs you will incur throughout the year. Most importantly, your marketing ideas are important and when you plan for them on a calendar, you actually make them important and more likely to be followed through on. Quite simply, without a marketing budget, plan and calendar, it can be very easy to let your marketing ideas slip through the cracks. In the big picture, leaving out even a small marketing idea can be costly to your business. Reality is, having a marketing budget and plan is just like planning your vacation. It is your road map to keep you going down the path you want to travel within your travel budget. Dare something great, Sandy Barris Fast Marketing Plan.com http://www.FastMarketingPlan.com

Pages

Leave a Comment

You must be logged in to leave comments. If you already have an SBA.gov account, Log In to leave your comment.

New users, Register for a new account and join the conversation today!