Do you think of marketing as an expense, or an investment? Too many small businesses treat it like the former, and budget to keep costs low. But marketing isn’t an expense, it’s a vital investment in growing your income, and cutting costs here often means shortchanging in the long run. What’s the right marketing budget for small business? Here’s the truth about what other small businesses spend on marketing, and five steps to help you build a budget and a marketing strategy that’ll pay off.
The Truth About Marketing Budgets
Determining how much your business should spend on advertising and marketing depends on the type of industry you’re in. For instance, the U.S. Small Business Administration says the average marketing budget is between 2% and 3% of gross revenues for established small businesses, 3% to 5% for startups. However, financial analysis firm Sageworks found that the majority of their small business clients only invested 1% of their revenues into advertising, which is the largest portion of most small business marketing budgets. What’s the right level to reach its goals?
If you drill down to the industry level in the Sageworks data, though, many industries spend far more on marketing than others. According to their data, manufacturing companies spent only 0.7% of revenue on advertising, while retailers spend 4% or more. Let’s take a look at the rest of Sageworks’ findings:
Small Businesses Spend on Advertising
Advertising To Sales Industry Code
Source: Sageworks Data – 12 months ending 8/31/2017
These, of course, are just the industry averages—so how do you decide what’s right for your small business? To do that, you first need to establish your marketing strategy.
5 Steps to Build Your Marketing Strategy
Until you have a strategy, the amount you should set aside for your small business advertising budget is moot. You need to know what you’re going to spend that budget on, the return on investment (ROI) you expect to generate, and how you’re going to measure success.
In the next few sections, we’ll review how to build your strategy, audit the competition and determine how much your small business should spend on marketing. Let’s begin where the rubber meets the road: your sales funnel.
1. Understand Your Sales Funnel
As you’re building your strategy, it’s important to recognize how the overall marketing and sales funnel has shifted. For decades, transactions were generated mainly by a persistent sales team with a bit of assistance from marketing and advertising at the top of the funnel. Today, the sales funnel is much different.
The businesses providing customers with relevant, factual, on-demand information are succeeding. Customers want to search and shop at their own pace, and usually don’t want to feel like they’re being sold to.
As Google discovered in their groundbreaking 2011 study The Zero Moment of Truth, 88% of consumers conduct research before making a purchase. On average, they consult 10.4 sources before taking any action with a business.
With consumers doing so much of the homework before they even contact you, the job of the sales team has evolved from convincing customers to buy to helping them to convert.
Given the upfront investment companies need to make in order to drive sales, understanding the number of resources—time, labor, company information—it takes to move someone from visitor to prospect to customer is crucial.
To do this, track the entire customer journey from beginning to end, assuring that each customer touchpoint is measurable, and quantify the amount of effort that goes into each one. What does this cost you in terms of personnel time, tools and other costs? Assign dollar amounts to these efforts so you can compare them to the revenue they generate.
Reviewing these data points with analytics tool will reveal bottlenecks in your sales funnel that could be improved by augmenting the advertising budget for your small business.
2. Perform A Competitive Analysis
To build a strategy to take on the competition, you have to understand how they behave. Auditing the marketing of your closest rivals gives you insight into how they’re operating, how their customers feel about them, as well as what’s working and not working.
One of the simplest ways to do this is to create a chart tracking every pillar of your competition’s marketing. This will allow you to compare, side-by-side, each website, social media account, review page, newsletter and pricing model of the companies you’re competing against.
By posing as a customer on these channels, you can evaluate what your competitors do successfully that you can copy, what they do poorly that you could improve on, and where the opportunity gaps exist in the market.
3. Pinpoint Your Ideal Customer
Do you know who you’re trying to communicate to? While your knee jerk answer may be, “everyone,” such a broad target won’t help you serve anyone. Instead, your goal should be to identify a very narrow group of people dealing with a specific problem or need that you can help better than anyone else. From that foundation, you can add more niches and scale up your customer base as you grow.
Ask these six questions to hone in on your target customer:
- What problems does your company solve?
- What type of customer currently works with you?
- What problems are they trying to solve?
- What does your customer need right now?
- What benefits does a customer gain by working with you?
- Where is your customer based?
Your ideal customers are at the intersection of those questions. Targeting them first will save you months of guesswork and unproductive attempts to be all things to all potential customers, most of whom are unlikely they are to do business with you for the time being.
Focus leads to success.
4. Decide How You’ll Reach Your Niche
Once you’ve identified your target customers and how your competitors are already marketing to them, you’ll need to identify the marketing channels your business should use to reach them best.
There are plenty of channels where you can reach your customers. These include online advertising through Google Adwords and Facebook, email marketing, traditional advertising on television and radio, Search Engine Optimization and content marketing, as well as public relations and corporate sponsorship.
Deciding which avenue is right for you should start with how you analyze your sales funnel. If you’re already generating significant sales leads by advertising in your local newspaper, exploring more offline channels is a good first step in the process. Using information you’ve documented in your competitive analysis report, you’ll be able to see which channels are already generating awareness and engagement in your industry, making them an another attractive platform. The advertising and marketing channels you choose should tie back into your quarterly or yearly goals, which we’ll learn more about later. By assigning specific targets to these goals, the easier it will be to select promotional channels.
Your most successful marketing channel today may not make your top five business drivers by next year. With how quickly customer behaviors change, you need to constantly monitor the performance and ROI (return on investment) of each channel you choose to market in.
5. Measure What Matters
One KPI (key performance indicator) every business needs to identify is a way to attribute revenue to your marketing investments. Without that, you can’t evaluate the effectiveness of specific advertising or marketing campaigns, or make good decisions on whether or not they should continue.
While the metrics you analyze vary based on your industry, revenue attribution cuts to the bottom line of your operations—how much of a return did a certain action drive given the investment?
For example, an online pet retailer should always be testing new ways to increase their traffic and improve their overall Cost Per Acquisition, which is the total cost of a campaign divided by the total number of conversions (i.e. customer sales). An insurance company, on the other hand, has a longer sales cycle and should, therefore, focus on ways to enhance their Cost Per Lead, which is the total cost of the campaign divided by the number of leads generated (i.e. sales leads, people who enter the sales funnel). While traffic is important to the insurer, it’s not as important as it is to a volume retailer like the pet supplier.
Tracking metrics like website visitors and product conversions from your website requires a specialized tool like Google Analytics. Google Analytics is one of the most commonly used website tools used across the world, and is free to install on any website. That data can help simplify your ROI calculations, providing clarity against the effectiveness of your business strategy.
Using Your Marketing Strategy to Build a Marketing Budget
Once you have that strategy in place, you’ll have a clear plan for how marketing will support your bottom line, a manageable audience you want to reach, how your competitors reach them, how you want to reach them, and how you’ll measure effectiveness. In other words, you know what you want to do with the money, and how that’s going to help move your business forward.
The next step is to set your growth goals and work backwards to establish the marketing budget. But before you set your goals, there are still a few other costs and variables to consider.
Review Your Historical Marketing Budget
While the SBA’s average marketing budget for small businesses acts as a benchmark against your competition, your own history matters, too. Analyzing budgets from previous years and how they influenced your revenue provides insight into where you may have over- or underestimated your business’s promotional needs.
To do this, compare last year’s budget to your current estimations for a year-over-year view, and compare that to the prior year’s results. Match each corresponding column in your budget and compare the funds you’ve allocated for each channel and time period. Then, consider emerging trends in your industry, the market as a whole and how your needs have evolved. Directly comparing what you planned to spend versus what you actually spent last year should help clarify which assumptions in this year’s budget are likely to be true, and which ones are likely to be off. Use that to recheck your marketing strategy and refine those plans before setting this year’s budget.
Set Your Goals and Work Backwards
Now that we’ve covered how to develop the strategy, it’s time to establish goals to set your small business marketing budget against.
These goals could be as simple as improving the total number of sales qualified leads from your Facebook page, or as nuanced as driving more 37-year-old women working as food operations managers in Lincoln, Nebraska to sign-up for your latest research webinar on corn production.
You can develop these goals by asking yourself questions like, “how many sales leads do we want to generate via email in Q2?” or “how many direct sales do we want to generate from paid search?” You may find that, based on what you can afford to invest according to your operating cash flow, some of your goals may need to be reconfigured, put on hold or increased.
It’s also possible that it’s worthwhile to take on some debt to fund these initiatives. For example, you don’t want to overextend your current growth plans without asking questions like“what is the sales threshold that our production team can handle without sacrificing quality?” Growth is great but not at the cost of diluting your product.
Once you’ve established your strategic goals, we recommend working backward to determine just how much of an investment you’ll need to make in your small business marketing budget to reach each goal.
The Bottom Line on Advertising Costs for Small Business
How much should a business spend on marketing and advertising? Clearly, it depends.
Your small business’s advertising budget depends on the industry you’re in, the stage of your business and how aggressive your growth plans are, the buying behavior of your target customer and your own preferences.
Ultimately, what you decide to allocate for promotion should be based on how you want to grow your business, increase brand awareness, attract new customers and drive a positive return on your investment.
Remember, your small business advertising budget can always be adjusted. A solid marketing strategy is the tool you need to steer it the right way.