One of the biggest questions we hear from small business owners and marketers is: How do I know how much to spend on marketing?
This can be tricky to figure out.
Beyond the obvious answers like, “it depends,” or, “as much as you can afford,” there needs to be a better way to decide your marketing budget.
But the truth is that there really is no one “right” way to set your marketing budget. Most likely, the best way for you decide how much to spend is to look at a few different factors and then combine them to come up with an amount and a strategy that seems to make sense for you.
You can break down the process into 2 basic approaches:
- Top-down budgeting – Start with your company’s revenue, size, and goals. Use benchmarks and historical data to set a high-level budget and then allocate those funds to individual budget line items.
- Bottom-up – Break down your budget into all of the individual components (advertising, employees, software, video marketing), estimate the amount for each item, and then add them up to create a full marketing budget.
Which one’s the right approach for your business? Probably both!
It can be helpful to use both strategies to help you pinpoint a marketing budget that will help you accomplish your goals. To help you through the process, we created this infographic that will give you some guidance and also provide some benchmarks that can put your budget in perspective.
Top-down budgeting based on historical data
To set your marketing budget, you may want to start with a top-down approach. This means that you begin with your ultimate business goal and work backward to try to estimate how much you’ll need to spend in order to reach that goal.
It’s really just a matter of following a few simple steps:
1. Define your marketing goal for the year
No matter how much you spend, what is your goal for your marketing dollars? Do you want to grow your business by 20%? 30%? 150%?
Quantify this into a dollar amount.
For example, say that you want to grow your revenue by a total of $15,000 in 2019.
This tells us what you want to accomplish with the money you spend on marketing. Next, we need to define how much you’ll need to spend in order to achieve that.
2. Calculate your marketing ROI
With our top-line growth goals in hand, it’s time to do some math.
The number we need to calculate is the ROI of the marketing dollars based on historical performance.
The easy way to do this: Take last year’s revenue growth and divide it by last year’s marketing spend. If you grew revenue by $10,000 last year and you spent $3,000 on marketing, then your ROI is 3.33 or 333%.
This means that for every $1 you spend on marketing, you should expect a return of about $3.33 in new revenue.
3. Determine your baseline marketing budget
Based on the revenue goal that we defined in step 1 ($15,000) and the ROI that we calculated in step 2 (333%), we can now estimate how much we’ll need to spend in order to hit our new goal.
The formula here is simple: Revenue Goal / (Marketing ROI % / 100) = Marketing Budget
Working from the numbers above, we get: $15,000 / 3.33 = $4,500.
This means that, according to our historical marketing performance, we’ll need to invest about $4,500 in marketing this year to achieve our target of $15,000 in revenue growth.
But wait–there are a couple of other things to consider.
4. Add in salary, administrative costs, and overhead
Marketing doesn’t happen on its own.
In order to create a realistic budget, you’ll need to add in costs for marketing salaries, administrative costs, tools/technology, and any other overhead that goes into running your marketing program.
So, let’s assume that you have a budget of $4,500 to spend for the year.
- Website – Squarespace ($216/year)
- Promo.com ($828/year)
- Freelance graphic designer ($1,500/year)
- Freelance writer ($1,500/year)
- MailChimp (free)
- Hootsuite (free)
- Google Analytics (free)
- Hello Bar (free)
- Optimizely (free)
- Canva (free)
That brings your total marketing budget to $8,544 for the year.
Use Benchmarks to Fine-Tune Your Marketing Budget
Is your budget realistic?
There are a few ways to tell.
One good way to do this is to use marketing or industry benchmarks.
Research shows that the average marketing budget is about 7-8% of total revenue or about 10% of the total operating budget.
You can use this benchmark to assess your budget.
Assuming a marketing budget of about $8,000, we would expect your company to generate around $100,000 annually.
Of course, that’s not a one-size-fits-all prescription for setting your budget.
It will also depend largely on the lifecycle stage of your business. Are you a high-growth company looking to rapidly expand? Or are you a stable and mature business just looking to maintain your revenue and maybe see a bit of a bump?
Benchmark studies have found that companies at different stages in their life cycle tend to spend differently on marketing. Companies that need to focus on building a brand from scratch or are looking to really ramp up sales will likely need to allocate more of their revenue to marketing and growth.
As a percentage of revenue, here’s how it usually shakes out:
- Early/Growth Stage Companies – 20%
- Stable Companies – 10-15%
- Mature Businesses – 5-10%
But, this isn’t the only benchmark to consider.
Your industry will also impact how much you want to spend on marketing.
In many cases, consumer brands like makeup, food, and electronics that rely heavily on brand recognition will need to spend more on marketing than targeted, direct-response focused businesses like real estate, healthcare, or e-commerce.
One study from Deloitte found that marketing budgets span a pretty broad range as a percentage of the overall operating budget, across different industries.
- Consumer and packaged goods – 24% of overall budget
- Tech software – 15% of overall budget
- Services and consulting – 12% of overall budget
- Healthcare – 10% of overall budget
Most small businesses seem to hover around 10% of total operating budget spent on marketing and advertising.
Choosing where to allocate your marketing budget
The last step in the budgeting process is deciding exactly how to allocate your dollars.
While you may have a general idea of your individual budget line items, you can adjust them based on your specific goals.
Start by breaking your budget down into 4 main sections:
- Brand marketing (sponsorships, events, etc)
- Promotion (advertising)
- People (salaries or freelancers)
- Systems (software, tools)
To give you a general idea of how you may allocate your dollars, a study from GetResponse found that these channels and strategies are driving the most growth in marketing spend:
- Social media (59%)
- Mobile marketing (50%)
- Email marketing (42%)
- Video marketing (28%)
- Content marketing (26%)
You can also calculate your ROI from specific marketing channels in order to decide where your dollars should go. (If the ROI is unknown, you may want to assume it’s 0 so you don’t allocate too much budget to a channel with an unknown return.)
The specific channels and the allocation that you choose will depend heavily on your business, where your customers are online, and how you can most effectively communicate with them.
But, one thing is clear. Social media channels are drawing increased spending within the marketing budget. Platforms like Facebook, Twitter, and YouTube are driving traffic, leads, and sales.
More specifically, social video is exploding in both popularity and effectiveness. Video marketing has shown to be one of the most popular emerging strategies in nearly every industry and it’s driving marketing results and ROI all kinds of businesses.