Creating a marketing budget for your small business is arguably one of the most important planning tasks you will do. If you are a start-up it's hard to know where to begin as you won't have much historic data to work from; if you are growing fast you'll need to think about which channels are performing, and where to test new budget. We've produced this guide to help you approach your planning, and provided some handy benchmarks to help you validate your final budget.

Marketing Budget as a percentage of Revenue

This is a great place to start, a quick and simple calculation that can give you a total ball park figure for how much you should be spending on marketing in a year. This is also a great key performance indicator (KPI) to monitor monthly, throughout the year, to assess your business performance. Rather than looking at this as a percentage, you can also consider this as a marketing budget to revenue ratio.

Start with last years marketing spend and divide it by last year's revenue and multiply by 100 to get the percentage. Then take your forecast revenue for next year and apply the percentage to calculate your marketing spend.

For example:

Last year's revenue was $500k and marketing spend was $50k therefore marketing spend as a percentage of revenue was 10%. This year sales are forecast to be $700k and if you want to spend a similar proportion on marketing again your marketing budget will be $70k (10% * $700k)

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What's a typical marketing budget percentage

Gartner's annual CMO survey concluded that on average companies were spending 9.5% of revenues on marketing, however this is very industry dependent with B2B companies typically spending less than B2C businesses. Marketing budgets are on the rise, whilst many companies pulled back spend in 2021, 2022 has seen marketing spending nearly back to pre-pandemic levels.

Marketing budgets as a percentage of revenue should be looked at in line with the business Gross Margin percentage; businesses with a high Gross Margin percentage eg. 70% could spend 15-20% on marketing and still have the ability to spend in other areas and make a profit; this is often the case with direct to consumer businesses. However businesses with a lower Gross Margin percentage eg. 40% will usually need to spend a lower percentage on Marketing.

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Marketing budgets and Revenue growth

Some businesses plan to invest in marketing, grow revenues and make a loss; often in these businesses marketing can be 40% or more of revenues. This is a high risk approach, whether hockey stick growth arises before cash runs out needs careful management, planning and execution. In theory, with effective marketing, revenues should grow with increased marketing spend; however, if a large proportion of marketing spend is allocated to untested or new channels the risk of not delivering increased revenues rises.

Our advice: Split your marketing budget into low and high risk activities, which activities are you certain will bring customers, and drive revenues? And consider the proportion of your marketing budget that you will dedicate to exploring new channels. Check that you have balanced the more risky marketing investments with available cash flows.

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Marketing Budget Split by Channel

Once you have decided on a total amount to spend on marketing, the next step is to break this down into channels or campaigns or ideally, both, to develop a marketing plan that you or your team can execute. A marketing channel is defined as the people, organizations or activities that make goods and services available for use by consumers, in other words, the ways in which businesses communicate with their customers about their products.

Some examples of marketing channels:

• Direct Sales
• Traditional marketing channels such as print, radio, tv, direct mail
• Digital marketing channels such as social media, organic traffic, email, paid search, video, content marketing
• Influencer marketing
• Word of mouth
• Events and Networking
• Community based

Often, the marketing channels you will choose for your business will be driven by your sales channels; for example if you run a retail store, community based events might be the best approach for driving local awareness and engagement. However, if you run an e-commerce store, the majority of your budget will likely be focused on digital marketing channels. The owner of a B2B business might invest in networking and direct sales to drive revenues.

Our advice: Consider how much of your budget is being invested in fixed marketing costs vs variable marketing spend. For example, if you need to pay a digital marketing agency $5k / mth to run your ads, how much is your ad budget? The fixed spend will be more effective, the higher the ad budget they have to spend. Remember to allow for the cost of content creation within your digital marketing budgets too, as agencies depend on great content, including video to achieve a strong ROAS (return on ad spend).

Marketing Budget for a Start Up

You have just launched your business, so how much should you be spending on marketing? To a large extent this will depend on how much you are willing to invest in the early stages where it may not be clear which marketing activities will drive awareness of your new venture and result in sales. There are a number of low cost approaches though, with the main expense being the opportunity cost of your time:

• Building a website - tools such as Wix and Squarespace are easy to use, very low cost and mean you don't have to be a website developer to get started
• Social media - facebook, instagram, tiktok, LinkedIn are all free to join; a word of warning though, gone are the days of free organic reach, it's a pay to play era
• Developing website content and improving your organic search traffic; tools such as ubersuggest are great for researching keywords and developing an SEO strategy
• Email marketing - platforms such as MailChimp and Klaviyo are relatively low cost, and typically email has some of the highest conversion rates for e-commerce businesses.
• Google my business - create a profile and appear for free in maps and search, a great way of communicating opening hours and other business information
• Local business directories - great for backlinks (and improving your SEO) building your local business profile can be a great way to network and attract new customers
• PR - have a story to tell? Get in touch with your local news providers and magazines!

Marketing KPIs

Now you have your marketing budget, it's important that you monitor your spend monthly, and review your marketing key performance indicators regularly too. Developing a monthly cadence of reviewing your business and marketing performance will allow you to adapt your plan quickly and make decisions in a timely manner. If your marketing is working, and you have the cash to do so consider investing more in high performing channels; if areas of marketing are not performing consider whether to change tactics, or pull back on the spend in that area.

Marketing KPIs are also a great way of communicating your goals to your team members and external parties you work with such as marketing agencies. And can be used to measure their performance too.

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Need some help setting your marketing budget?

Drop us an email helen@helenastle.com

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Photo by gerhard crous on Unsplash