A question I am often asked is how much should I spend on marketing? Unfortunately there is no simple way to answer this question. However, there are some general guidelines which you can follow to help determine your marketing budget.
It is our observation that most small businesses or start ups spend very little or no money at all. Those that do spend, often do not spend as much as what they should.
The fact is that most businesses need to invest money (and time) at some level to grow – the only exception to this is unless they have an established business that relies on word of mouth and is successful at generating profitable referrals.
Compare This To Other Businesses
If you compare this to larger businesses or big brands, many spend anything between 5-20% of expected turnover. A grocery brand for example might allocate 6% of gross sales volume to Advertising and Promotion and a further 12-14% to Trade Spend. (A simple definition of Trade Spend is money you give to retailers to ensure your product appears in their catalogue & so can sell your product at a discounts). The businesses that spend less often have an established reputation and have brands that can make sales with very little effort.
If you look at my example above, and add up all promotional monies and exclude marketing staff salaries, that’s at least 20% of total sales volume allocated to marketing and sale promotion.
My take is that spending a minimum of around 5% of turnover is a good figure for most small businesses to start with.
It’s not a hard and fast rule.
This is because different businesses can have very different cost structures and profit margins. If you are only making 5% profit from sales turnover then spending 5% of your budget on marketing isn’t going to make that much sense. For example, if you are aiming to sell volumes of product at low margin, then you may need to spend less. If you operate in an industry that enjoys high margins, then perhaps you should you increase your spend.
A good way to gauge this is to look at the industry you are operating in. Perhaps even look at a competitor that has a similar business to you.
Many public companies have annual reports which show their annual turnover and marketing expenditure. By dividing the marketing expenditure by the annual turnover, you can work out a percent spend for your industry.
What if you are a start up?
If you are a start up you should have a business plan. Your business plan should forecast your turnover for the year and your expected profit.
When you know this data, you can then make informed decisions and allocate a percent of your turnover to marketing. In this instance, I recommend allocating more than 5% of your budget. The reason for this is that a start up will incur additional expenses such logo & branding development as well as development of other marketing materials.
I’ve heard some marketing companies say that start up businesses should invest a minimum of $20,000 for marketing your business. Personally, I don’t think this is a hard and fast rule.
Compare this to Networking
And if you think $20,000 is a lot of money to spend, compare this to many start ups who use networking as a means to generate business. If you join a group, the costs might be anything from $16,000 upwards when you consider:
- Membership fees at $1,000
- Personal time in meetings @ 2 hours per week over 52 weeks at $100 per hour
- Personal time spent catching up with people from your networking group @ assumes 20 meetings over 1 year with 1.5 hours meeting
- Meal & coffee expenses @ 30 per week over 52 weeks
What this means for your marketing budget is you need to determine the most effective way to spend both your time and your money in marketing your business. Ultimately, the pool of funds that you have available will help determine what media is most effective in helping you get a return on your investment.
If you are specifically interested in online marketing, here is a handy little digital marketing budget calculator I found which breaks digital marketing activities down by company type. market, time frame and annual revenue.