Marketing and advertising are a crucial part of driving your company’s growth and expansion. Determining how much money to spend in these areas can often be a daunting task for a small business owner.
Spend too little and you risk stalling your business, spend too much and you can eat away at your profit margins.
How to Calculate Your Marketing Budget
Percentage of Gross Revenue
Setting a marketing budget as a percentage of your gross revenue is the most commonly used method for most companies, both large and small. According to the U.S. Small Business Administration, companies with revenues less than $5 million should allocate 7-8% of their revenue to marketing.
There are many factors to consider when looking at this number, however. This percentage assumes you have margins of 10-12% after the marketing budget and other expenses have been covered.
Additional Considerations for Determining Your Marketing Budget
While 7-8% of gross revenue is a good rule of thumb, there are many other things to consider when setting your marketing budget.
- Growth Stage – In the early years of business when you are trying to build a brand, spending up to 20- 50% of your gross revenue on marketing and advertising can be appropriate.
- Your Industry – Certain industries, such as retail, may spend significantly more on marketing than other industries. A good rule of thumb is to research what your competition is spending. Public companies in your industry may publish their marketing budget in their annual reports. Smaller, private companies in your industry will probably not readily give up that information, so you may have to spend some time looking at their marketing efforts to determine what they are spending.
- Volume vs. Margin – Is your business model set up to leverage volume or margin? A volume based business may spend less on advertising and marketing, knowing that the small percentage of a very large business can equal a sizable budget. Walmart, for example, only spends 0.4% on advertising. A margin driven company may have a smaller annual revenue base, and would spend a higher percentage on marketing.
What you do with that marketing budget is just as important as how much you allocate for it. Traditional marketing and advertising plans have now been joined by digital marketing. The Chief Marketing Officer (CMO) Council recently reported that U.S. marketers spend an average of 2.5% of their total company revenue on digital marketing activities (according to a new report by Gartner Inc). Having a savvy marketing plan that includes both traditional and digital marketing strategies is important for businesses to grow and thrive in today’s competitive marketplace. Whatever your marketing budget is, be sure to use it effectively to achieve your business goals.