This is a question we get asked on a frequent basis but we’ve never covered in a blog, so here goes. This is what we believe a small business should spend on marketing.
General Rule of Thumb
There are huge numbers of articles out there that will tell you how much you should spend on marketing. A search on the title of this article showed 294,000,000 results! Gartner does a CMO Survey every year. Their latest figures, published in October 2019, show marketing spend averaging at 10.5% of revenue. The US Small Business Administration suggests 7-8%. B2B Marketing magazine’s survey of 2018/19 marketing budgets said the average small business owner will dedicate 16% of their annual budget to marketing.
How to work out what you should spend
As small business marketing consultants, the way we help our clients to calculate their marketing budget depends on the answers to six questions. Let’s look at how you can use those questions to calculate your marketing budget.
- How much did you spend on marketing last year?
- How much of that spend delivered a good return on investment (ROI)?
- How many new clients did you acquire, compared to how many you lost?
- Do you want your growth to be faster, or the same, as last year?
- How long is your typical sales cycle?
- How competitive is your market and where do you sit in the hierarchy?
Let’s look at these in a little more detail…
This should be a fairly simple question to answer. Your accounts system, particularly if you are using something like Xero or Quickbooks, will give you the answer in moments. We will expand on the question to identify how your marketing spend was spent.
- How much on staff/agency fees?
- How much on marketing technology – to help deliver the marketing?
- Mailchimp, or other email marketing tools
- Your CRM
- Hootsuite or other social media management tools
- SEMrush, or other SEO monitoring tools
- Website hosting
- Advertising spend, including social media?
- Networking event?
The final question here is: was this a budgeted spend, or did it happen as and when you could afford stuff?
There is no point in spending more money on marketing that didn’t work last year. The only proviso here is if you were unsure whether you were doing it right. Some guidance, or training, in that marketing channel may deliver far better results.
If you don’t know what is working for you, work it out. Assuming you have a list of every lead you generated last year and have marked it with the lead source, the calculation should be easy.
Marketing Channel ROI = revenue generated from that channel/Marketing Spend on that channel
The marketing activity that delivered a great ROI should definitely be done again, maybe with even more resource dedicated to it. Those with a poor ROI are unlikely to be done again. If you need a hand calculating this, please get in touch.
How many new clients did you acquire, compared to how many you lost?
Marketing isn’t just about acquiring new clients. Alongside your account management activity, it is also there to help you keep your current clients. Unless every client you have is buying every product or service you sell, there are still sales opportunities in that pot.
Growth for your business meaning acquiring more clients each year than you lose. If you are losing clients at a rate that means you aren’t growing, more of your budget needs to be spent on either marketing to your current clients, or on delivering what they want.
Let’s say your business grew by 15% last year on a marketing spend of £50,000. How does your target for this year compare to that 15%? If you want to grow by 30% this year, you need to allocate 100% more (£100,000) to your marketing budget this year. It may be that you don’t spend all of that, but better to budget and not spend, than not budget. It is unreasonable to expect your marketing to deliver more for the same. Whether you credit Henry Ford, Albert Einstein or Tony Robbins with the phrase, it is still true. “If you always do what you’ve always done, you’ll always get what you always got.”
For sales revenues to grow, you need to be able to do, at least, one of three things:
- To increase prices
- To sell more to your clients
- To sell to more clients
For this to happen, the creation of leads needs to start before the revenue starts to increase. If you have a three-month sales cycle, you need to start creating more leads three months before you want revenues to start increasing.
If you are entering a completely new market, you have to make a lot of noise to generate awareness. If you are entering a highly competitive market, with competitors who are spending on marketing, you need to either spend more or shout louder/better. The only time you can get away with a, slightly, reduced marketing spend is if you are one of the top players in that market. I say slightly because you still have to maintain brand awareness and you have to continue to show why you are better than the rest.
Answering the question “how much should a small business spend on marketing” initially sounds like a simple question of percentages. Whilst that is a good starting point, it then needs to be adjusted to meet your growth targets and aspirations. These questions will help you get to the answer you’re looking for. It may be that your marketing budget can be below the 10.5% that Gartner’s survey suggests. Of course, it may also be higher than that too.