How should a small business decide how much to spend on marketing?
Set the budget from your own numbers. Work out what a new customer is worth and how much of that you would spend to win one, then how many new jobs you want and how many inquiries that takes. Put most of the money into channels your records show bring jobs at that cost, keep a smaller fixed amount to test one new channel with an end date, count your own hours as well as money, and adjust after each review.
Start from what a customer is worth
The related answer on what a customer is worth shows how to work out the value of a typical customer after the cost of the work. From it, choose the most you are willing to spend to win one new customer while still making a profit. That ceiling, a cost per new customer the business can live with, is what every channel gets judged against.
Turn the goal into an amount
- Decide how many new jobs you want each month, and how many inquiries that takes; the related answer on how many inquiries you need covers the calculation.
- Take off the jobs that already arrive through referral and direct. They still take time, but usually little or no ad money.
- Multiply the jobs you want from other channels by your ceiling cost per customer. That is the most the plan should spend on them in a month, not a target to hit.
- Count everything: ad spend, agency or freelancer fees, tools, printing and your own hours. The U.S. Small Business Administration's marketing plan guidance, summarized in the related answer on what a simple marketing plan should include, asks for "a complete breakdown of the costs", tracked once the plan is running.
Proven channels first, then one test
- Put most of the budget into the channels your records show bring jobs under your ceiling.
- Give one new channel at a time a fixed amount and an end date, and decide in advance what result would make you keep it.
- Keep the test amount to what the business could lose without strain.
What about a share of revenue?
Some businesses set the budget as a fixed share of revenue. It can be a quick starting point, but on its own it says nothing about what your channels cost or bring in. The right amount usually depends on your margin, how fast you want to grow, how much work already comes by referral, and how busy your season is, so a share that suits one business can be wrong for another. The related answer on marketing for seasonal businesses covers planning marketing around busy and slow months.
Review it and move the money
The SBA says to compare marketing and sales costs with the revenue they generate, aiming for a positive return on investment, and to maintain a marketing plan at least once a year. As general advice, look at the cost per new customer for each channel every month, move money toward the channels that stay under your ceiling, and give slower channels such as search long enough before you judge them. The related answer on whether your marketing is working lists the numbers to read.
Sources
Related answers
- How do you work out what a customer is worth to your business?
- How many inquiries does a small business need to hit its goals?
- How do you know if your marketing is working?
- How should a seasonal business plan its marketing?
- What should a simple marketing plan for a service business include?
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