Selling yourself is a part of every business, and marketing is the way it’s done at scale. But how much should a small business spend on marketing?
Like any question worth asking, the answer depends on your situation. Read on for some insight into what businesses are spending on marketing today, and what you need to think about before setting your own marketing spend.
Define your needs
What you want to achieve goes a long way to determining your budget. Your needs are different from other companies and will change over time. You may want to:
– Grow fast
– Grow sustainably
– Build brand awareness
– Maintain an established presence
These are all very different goals, with different associated costs. If you’re just starting out, every company needs a cohesive brand and a functional, professional website. Beyond that, your needs are completely custom.
With that caveat, there are some standards you can use to set your expectations.
How much should a small business spend on marketing?
Marketing budgets are normally measured as a percent of company revenues. To get a dollar amount from the percentages below, multiple them by a firm’s gross revenue.
The August 2018 CMO Survey from the American Marketing Association found an average marketing spend of 7.3% of company revenues from 324 respondents across the US.
The chart below shows this is lower than recent years, but still within a typical range of 7-9% of revenue (source page 26).
Marketing for startups vs established firms
The report calculated average marketing spend by company size, as seen below (source page 27). Generally, smaller firms spend more on marketing than larger companies.
The first step of marketing is brand awareness, so smaller businesses without established brands are wise to spend more on marketing. Established brands can get away with a more efficient budget.
Ryan Flannagan of Nuance Media writes startups should expect to spend 12-20% of gross revenue on marketing, while noting a larger firm may only spend 6-12% of gross revenue on their marketing budget.
When the rules don’t apply
Knowing the rules helps you know when to ignore them, and a standard marketing budget won’t suit every company.
The CMO Survey breaks down marketing budgets as a percent of firm revenues by sector, below (source page 27).
Clearly there are situations where a big traditional marketing spend isn’t as useful. B2B services like mining, manufacturing, and professional services for instance typically rely on sales teams to attract new clients (with sales rarely included in marketing budgets).
You can over-spend on marketing. First, there’s the opportunity cost of a high marketing budget that may be better spent on product or business development.
But there’s also the risk of growing too fast. If your marketing is too effective, you may face more growth than you can handle. That can cause serious cash flow problems that undermine other parts of your business, potentially sending you out of business.
Avoiding this isn’t difficult. First, don’t borrow more than what you need for the growth you can handle. If you’re using Marketlend to access flexible, peer-to-peer finance, don’t over leverage yourself. Make your repayments and you can always extend your line of credit later.
If you do have cash flow issues as you grow, a service like UnLock can provide extended payment terms to supercharge your cash flow, like a corporate version of buy-now-pay-later.
Pay it smart
The key element when setting a marketing budget is to be deliberate. Approach your marketing spend with a critical mind and a clear vision of what you want to achieve, and you’ll be miles ahead of the competition already.