How much should a small business budget for marketing?

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Summary

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. If you've been in business between 12 -18 months, use 5% of your gross revenue and build up as your revenue scales.

Almost all businesses plan to increase their investment in at least one digital marketing channel in the next year. But according to the U.S. Small Business Administration, many small businesses don’t allocate enough money to marketing, or they spend their marketing dollars haphazardly. This is because many small businesses have not properly budgeted out their marketing strategy, or have thoroughly thought through the best ways to use their advertising budget.

What’s interesting is 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). But according to  Libby Bierman, Analyst at Sageworks, “[…] Data shows that the average small business invests about 1 percent of its revenues into advertising.” Granted, this varies from industry to industry.

Advertising To SalesIndustry
4.44%Furniture Stores
4.16% Jewelry, Luggage, and Leather Goods Stores
3.84%Offices of Real Estate Agents and Brokers
2.87%Schools and Instruction
2.73%Beverage Manufacturing
2.18%Amusement and Recreation Industries
2.16%Home Furnishings Stores
1.99%Personal Care Services
1.93%Restaurants and Other Eating Places
1.88%Specialty Food Stores
1.85%Agencies, Brokerages, and Other Insurance Related Activities
1.83%Death Care Services
1.08%All industries  
smallbiztrends.com

How to calculate your total marketing spend

There’s a pretty simple formula that you can use to understand how much you should spend a year on marketing. Although you can just arbitrarily decide to use 5% of your gross profits, there’s a smarter way to build your marketing spend so it’s not lost money, but will in fact give you a strong ROI.

Formula to make sure you don’t lose money on marketing:

Revenue per sale or lead / Cost per lead = ROI

Formula to determine marketing spend

Total Yearly Net Revenue * 5% / 12 = Total amount you should spend on marketing

So if you make $150K a year in gross revenue, but after costs and taxes you take home $100k, that would mean you have roughly $5k a year to work with. Not much if we’re being honest. But, even with a limited budget, there’s still a lot you can do. For example, there are over 30 ways to market your small business for free. Beyond that, you’ll need to do a little research to understand where best to put that money.

How to market your small business with a limited budget

Just because you have a limited budget now doesn’t mean it’ll stay that way. The beauty with marketing is its ability to scale your revenue, and therefore your marketing budget. If you want to start scaling your business, it’s best to have the mindset of reinvestment. If you can stomach it, you should be looking at reinvesting all profits into scaling your business – creating more advertising, streamlining operations, or improving product quality.

Cheap ways to advertise

With $400 a month (roughly) in budget, a business has several options to boost sales and begin a strong marketing foundation.

Step 1: Understand your target market

Or in other words, get to know your potential customers. Before creating a marketing budget, a small business owner needs to know which channels to use to reach potential customers. Best way to do that? Answer these questions:

  • Who is in charge of making the purchasing decision? Is it different than your target audience?
  • What is your target income level?
  • What is your target geographical area? Suburb? Big city? Rural area?
  • What brands does your target audience interact with regularly?
  • Where does your target market consume content? Who do they follow?

After answering these questions, you’ll have to play around with the different marketing channels, and where people are in their decision making.

Step 2: Understand the buying cycle

The best way to build your marketing budget is to first make sure you maximize your potential ROI. This means beginning where people are most likely to buy your product, so you don’t have to work as hard, or spend as much money to convert them into customers.

The best digital marketing bang-for-your-buck is with SEO (search engine optimization). Here’s quick refresher on how small businesses leverage SEO to bring in new customers:

  1. Use Google My Business to optimize for potential customers searching for your products or services locally.
  2. Check out Yext or Moz Local to synchronize all your local business information across all online local directories (This will help you get higher up on search results and get more people looking at your listing in local search results).
  3. Create a website that is focused on SEO. You’ll want to make sure you use keywords (phrases you want to be known for) that people use to find businesses like yours (EG: “best florist near me”). Head over to an online how-to-guide on SEO and make sure your site is primed for performance on search engines.
  4. Write guest posts for other blogs. Simply email blogs that talk about the industry your business is in, and offer to write a post for them.
  5. Make sure your contact page and information is on your site if you’re not an ecommerce brand. The last thing you want to do is spend all this money advertising and not give customers a place to spend their money.
  6. Find a way to capture email addresses. That can be through scheduling an appointment, offering a discount, or

After you’ve done all that, you’ll want to begin putting ad dollars using the bottom-up marketing strategy.

How to use digital advertising with a limited budget

Small businesses may also look to advertise through digital platforms, such as Facebook and Google AdWords. In most cases, these platforms can be tailored for small businesses by adjusting your budget for each campaign. That way, you don’t waste your budget or accidentally spend it all in once go.

The digital marketing sales funnel

The best way to begin is by creating a google ads account and begin using their keyword research tool. Make sure you limit your geographic targeting to only be in the areas you serve. Next, head over to facebook and look at doing two things: 1) running facebook retargeting ads (this will show advertisements to potential customers who have come to a business’ website) and 2) creating a “look alike audience.” If you have a list of emails, you can create a look alike audience to run ads to the exact same type of people who purchased from you. There will be a higher probability of getting a sale.

From there, a business owner can begin to expand their budget to travel further and further up the sales cycle, until they have conversions, engagement, brand awareness, and market share.

With $400 a month in spending, a business could be best suited to prioritize:

  1. Search Engine Optimization
  2. Local SEO
  3. Local Google ads

Search engine optimization is something that a local business can do on their own if they want, or pay an SEO specialist $100 for an hour of their time to do some keyword research for them.

Next, invest in local SEO. Head over to Yext.com and sign up for their local SEO package. For $499/year a business can cover all their local SEO bases. That averages our to $42/mo.

Next look into local google ads, and estimate out how much it would cost to run on local keywords. Make sure to specify the type of keywords you want to target (phrase match, not broad match – which is their default setting), what keywords to use as a starting point, and where geographically you want your ads to appear. Most small businesses can get away with starting out on a $200 – $400/mo budget.

Here’s how it would play out on a monthly budget of $400:

Month 1: $600 (SEO keyword research, Google Ads)

Month 2: $200 (Local SEO + Google Ads)

Month 3: $250 (Local SEO + Google Ads)

Month 3: $350 (Local SEO + Google Ads)

Month 4: $400 (Local SEO + Google Ads + Facebook ads/Yelp ads)

Month 5 – 12: $400 (Local SEO + Google Ads + Facebook ads/Yelp ads) and build as you go.

Test, Test, and Test. Don’t be afraid of making mistakes.

Knowing whether your spending is actually helping you achieve your marketing goals is more important than sticking rigidly to a budget. After all, no marketing budget is carved in stone. A small business can test new areas and outlets, like social media advertising, and examine the results. You can then pivot based on the outcomes.

Above all, have the patience needed to follow through on your marketing efforts across the organization. Don’t give up too quickly, because it takes time and effort to build and grow a brand.

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