Dozens of business owners have asked me, “What percent should I budget for advertising?” I think they expect me to respond authoritatively: “The average small business should budget 4.625% of gross revenue for advertising.”
There may be several reasons business owners would want a quick and easy answer to this question. They may simply want a shortcut to success. They may assume a mysterious formula like Albert Einstein’s famous E=mc2 can be used to calculate the perfect budget percentage for advertising. They may want ammunition to settle an argument with a business partner who is either “wasting money on advertising” or who “doesn’t want to spend anything on advertising.”
In reality, there is no clear-cut answer to the question of how much to budget for marketing. In many ways, marketing is a common sense issue. The problem with common sense is that it doesn’t feel common until you have knowledge or experience with something, and understand the experience, the method, or the tools! After that, it seems easy. So marketing is one area where no one has all the answers, but we feel our way forward by finding what works.
Why you need an advertising budget
Some people insist, “We don’t do any advertising. All of our business is word of mouth”; but when I ask them a few questions, it always turns out that they are doing some form of marketing. Word of mouth is marketing in itself. Something about the way they do business motivates their satisfied customers to advertise for them. They may not be paying for advertisements, but they are taking advantage of some form of communication to promote their business. That is what marketing is—communication.
Have you ever said, “We are busy already. Why would I spend money to advertise when we can’t handle more work?” Remember that even though you are busy now, the work on your books will eventually run out. You do need more work, just not right now.
If you wait to advertise until you need work, it’s too late. Paying your employees to polish floors and clean up corners is good once in awhile, but not for a whole month—or even a week. Efficiency goes down when employees know there is not much work to do. When customer work slows, production employees become an overhead expense and revenue goes down.This double hit to profitability quickly erases any money saved by not advertising. If something doesn’t soon turn in your favor, it could be the beginning of the end.
The opposite problem is unwarranted faith in the act of purchasing ads. Running an advertisement does not automatically mean more sales. When a business owner assumes that more ads equals more sales, he can burn through precious cash reserves without seeing any return on his investment. Disaster is not pretty regardless of whether you get there by no advertising or by foolish spending.
How to make better budget decisions
How can you make appropriate marketing budget decisions? It depends on your situation. It’s one thing to be mowing the neighborhood lawns with your dad’s mower and $20 in your pocket. It’s another thing if you are a veteran entrepreneur on your fifth venture with a million dollars of capital, and you need to get from zero to $150,000 a month to break even.
Make your marketing budget decisions in connection with your overall business plan. There are two ways to approach this. You can develop an overall budget for your business—including a marketing budget—and then determine the best way to invest those dollars. Or you can list all the marketing investments you would like to make and put that total into your overall business budget. Either way, you will likely need to go back to the drawing board and figure out how to reconcile what you want to do in marketing with the amount allowed by the overall business budget.
Here are some questions to ask when determining your marketing budget amount:
- In relation to growth goals, where are we, and where do we want to be?
- Should we attempt to sell more to existing customers or focus on attracting new customers?
- If all our growth came from new customers, how many new customers would we need to meet our revenue target?
- If all our growth came from existing customers, by how much would we need to increase our average dollar sales in order to meet our revenue target?
- In relation to risk, can we afford to lose these marketing dollars if they bring no return?
- Are there more efficient ways to market?
- Would a larger budget allow for greater efficiency in the long run?
- Should we make large investments up front that will pay back over the next three to five years?
- In relation to our sales cycle, how can we plant seeds that will yield a harvest six months, one year, or even five years from now?
- How can we improve our return on investment?
- If we had zero dollars to invest, what could we do to sell?
- How much of our profit should we re-invest in marketing? 10%, 25%, 50%, or 100%?
Budget for multiple lead streams into your funnel. Some businesses rely on leads from a single source—another business that sends them customers, a specific advertising method, or even word of mouth. That might be fine while it lasts, but if you are too dependent on someone else, it leaves your business vulnerable. What if the business that sends you leads goes out of business? What if market conditions, styles, or trends change and your customers don’t refer you anymore? Avoid getting caught in this trap by developing several sources for generating leads.
Budget for lead generation and lead conversion. Gaining new customers happens in two phases. The first is generating leads through advertising. The second step is building trust with leads, educating and serving them to convert them into customers. Consider the ways you will spend money for tools in each phase. Use print ads, brochures in public places, signs, referral agreements with other businesses, and direct mail to encourage prospects to contact your business. When they reach out to you, you will need tools such as brochure/catalogs, a website, product information sheets, and sales follow-up processes to convert that lead into a customer.
Is generating leads, or converting leads, your biggest challenge? While improving either area is beneficial, put the most effort into the weakest area for a better return on your dollar.
Budget for branding. Branding helps people remember you when they need what you have. The clearer picture they have of your business, the more likely they are to remember you as the go-to source. Allocate some dollars for shaping the way people think of your business. Gifts imprinted with your logo are a very popular way to brand. Calendars stand out as an all-time high performer in branding. Branding is wrapping your business in an attractive package. People buy more when the packaging is pretty.
Budget time. Marketing work does not get done by itself. Someone needs to think about it, plan it, and execute it. Make sure to plan for the cost of your time or your employees’ time that will be spent facilitating your marketing.
Budget for testing and measuring. You will be in the dark about the effectiveness of your marketing unless you test and measure the results. Remember to budget time and money for learning how much business you earned from each of your marketing investments. This makes next year’s budgeting process much more effective.
Understanding how much to budget for marketing may seem complicated, but remember, there is no one-size-fits-all answer. Carefully consider your needs, apply common sense to your marketing, and you will be able to find your way forward to success.