“You need to spend money to make money.” Whoever came up with that was probably in marketing, or should have been. Marketing is an investment that can offer significant returns. From brand development to influencer marketing to email campaigns, it’s a great way to differentiate your business in a crowded or competitive space.
But if you’re not careful, marketing is also a great way to waste money. A lot of money.
To control costs and maximize your ROI, you need a marketing budget. Easier said than done, right? Here’s what you need to know about carving out a budget for marketing in your small business.
(We’d like to thank content and communications strategist Jenny Hayward, formerly of Signpost, for providing many of the following insights and ideas. This article is an update of Jenny’s original article published on our blog in 2016.)
What Counts As Marketing, Exactly?
The first step in creating a marketing budget is separating marketing dollars from non-marketing-related costs.
Some marketing expenses are easier to identify than others. Paid advertising, newsletters, and search engine optimization are all clear examples of marketing costs. But outside of the obvious, marketing can be a tricky thing to pin down.
It helps to start with a definition. The American Marketing Association defines what we’re talking about as “the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.” Let’s rephrase that: marketing is how you attract people to your business and create value for those people.
Marketing is not sales. Marketing brings people to your business. Sales converts leads or prospects into paying customers.
Marketing is not always the same as networking or business development. It’s not solely about identifying strategic partnerships or creating connections behind the scenes.
Marketing is not synonymous with advertising. Advertising is one component of marketing—one way to attract potential customers and create value for existing customers.
Of course, in small organizations, there may be some overlap between marketing, sales, business development, and other related business processes. In other words, people may wear multiple hats. To effectively create a marketing budget, however, you need to focus on only those things that promote your business—i.e. that attract and create value for customers.
The following are common examples of marketing costs:
- ads
- branding
- website design
- public relations
- sponsorships
- email campaigns
- direct mail campaigns
- loyalty programs
- audience research and analytics
- blog content development
- promotional video development
- social media management
In addition to this list, don’t forget to account for marketing production. Ads and other marketing collateral most likely require design work and, in some cases, the cost of printing and materials, such as business cards, loyalty cards, and direct mail flyers. On top of that, consider the costs of any software and technology, such as email service providers and analytics tools, that you’ll need to run campaigns and manage marketing efforts.
How Much Money Should You Spend on Marketing?
There are a few (billion) different ways to answer that question. We’ll give you three:
1. Some businesses set marketing budgets based on customer acquisition cost (CAC)—the amount of money it costs to acquire each new customer. For example, if you’re looking to gain 100 new customers, and typically one in five prospects makes a purchase, then you’d need to generate 500 leads in order to achieve your goal. Your marketing budget should allow you to do that at the lowest possible cost to your business.
2. Other businesses base their marketing budgets on their competitors’ efforts. They keep track of competitors’ campaigns and then how much it would cost to execute a similar strategy. Although this approach is common, it’s not always ideal, as it tends to stifle inventive thinking and thus damage your ability to stand out in the market.
3. A relatively safe way to set a budget is to dedicate a percentage of reliable revenue towards marketing. This method ensures not only that you don’t overspend, but also that you pace out your resources. For businesses that choose the percentage method, the United States Small Business Administration (SBA) recommends spending 7–8% of your revenue on marketing. That’s a decent place to start—but you may want to spend less (e.g. 2–3%) or more (e.g. up to 20%) on marketing depending on the nature of your market and your larger business goals. For instance, an emerging business with a lot of cash to burn in a highly competitive industry may want to spend a multiple of what a low-revenue, highly specialized business would.
Within your marketing budget, you have countless options in terms of allocating costs. Generally speaking, it’s best to…
- avoid spending the entire marketing budget on one channel or strategy,
- have some mix of digital (websites, social media) and traditional marketing efforts (PR, print ads),
- spend the most on marketing methods with proven ROI, and
- ensure some money is left over for testing new strategies and covering unexpected costs.
However you design your budget, be sure to set clear goals: How much revenue do you expect to bring in based on what you’re spending? This will help inform where and how you use resources now and into the future.
Set parameters, including the timeframe that you’re planning for—be it monthly, quarterly, or semi-annually. In the beginning, it’s probably best to stick to shorter time periods so that you can gain insights and refine your approach as you find the right balance.
Don’t forget to take into account any changes you might be making to your offerings, whether adding a new line of products and services or eliminating underperforming lines. Be aware of the impact this could have on your business overall and do your best to forecast these effects so that you’ll be better equipped to manage them later on. Use data from the previous time range as a benchmark.
How Should You Measure Marketing Effectiveness?
A good budget is an analyzed budget. It’s not enough to push the proverbial button and hope for the best. Be diligent about tracking and measuring your results at the end of each campaign, as well as periodically along the way. Many marketing platforms (such as Facebook and Google Ads) have built-in analytics tools to help you determine your ROI. For other initiatives, such as direct mailers, you’ll need to find—and pay for—an external measurement solution.
Your accounting partner can help you review your budget and determine the ROI of your marketing spend—or any business cost, for that matter. Ask us about your budget.
Quick Note: This article is provided for informational purposes only, and is not legal, financial, accounting, or tax advice. You should consult appropriate professionals for advice on your specific situation. indinero assumes no liability for actions taken in reliance upon the information contained herein.
