How Much Should Small Businesses Spend On Marketing?

Finding The Right Marketing Budget for Your Business

How much should a small business spend on marketing? It depends.

Unsatisfying answer, I know. However, equally unsatisfying and somewhat disturbing, are the answers that use industry averages or percent-of-sales. Setting an arbitrary budget and then going out and finding a way to spend it is decidedly non-strategic.

The better approach is to first develop a sound strategy that delivers the maximum return on investment (ROI), and then figure out how to fund and implement it. Good plans find money, whether budget "exists" or not (even in large enterprises, money is never "lying around").. Likewise, you have more options than you might think. So be careful not to restrict your strategic thinking prematurely because of perceived financial limitations. 

Fixed and Variable Marketing Expense

In accounting, fixed costs are those that don’t vary with sales volume. They support fixed assets that generate or enable long term value creation. This is in contrast to variable costs like COGS (Cost of Goods Sold), or expenses like commissions and hourly wages in service businesses.

Accountants and CFOs use the fixed and variable expense categories to make strategic decisions about virtually everything related to profitability. Understanding the fixed and variable nature of your various marketing investments will likewise help you make your marketing initiatives more profitable.

Generally speaking, marketing investments either Drive Traffic, or Convert Traffic into Sales. Assets that drive traffic tend to be more variable in nature (such as advertising), and those that convert traffic tend to be more fixed or long-term investments (such as a website).

Both types are necessary. And finding the right marketing budget is a function of optimizing these investments. Too little (or mis-targeted) variable marketing investment, and no one knows you exist. Its like decorating the house but not inviting anyone to the party. Too little (or ineffective) fixed marketing investment, and prospective customers drop out of the sales funnel and go to your competitors. It’s like putting up the "for sale" signs without cleaning the house. People may come and look, but never develop a desire to purchase.

Crafting the Marketing Budget

I’ll go into more detail on the marketing plan in a subsequent post. For now, here’s a high level process for strategic market planning and budgeting:

  1. Work internally or with a consultant to help craft a strategy that delivers the best chance for reaching growth goals and delivering the strongest possible return on investment (ROI).
  2. Outline the customer journey - what are all the touchpoints and activities in which the customer engages along the way to a sale?
  3. Categorize each touchpoint or activity into fixed (project based) and variable (usually ongoing channel and advertising costs) investments
  4. Honestly assess gaps, or get some third party assessments of your fixed marketing assets, and estimate any costs to close those gaps.
  5. Build a business case to find optimal investment levels for variable channel and advertising programs—this should include things like sensitivity and breakeven analyses to better understand the impact of varying investment levels on profitability and ROI.

This works best when you start with the ideal state. Suspend notions about how much you think you can afford so you can first find the best opportunity. If your ideal marketing plan requires greater investment than your current cashflow situation allows, you will be in an informed position with regard to what tradeoffs are least compromising to the plan efficacy. 

Shoot me your comments or questions! Or contact me if you'd like to chat about a project.