How Much Should a Small Business Spend on Marketing?
Most business owners know that it takes money to make money. But how much money should be invested in marketing is one question SMB owners often ask me. It’s a very difficult topic to generalize on because it depends on so many different factors in your business.
However, it’s a given that you must invest in marketing in order to raise awareness amongst potential and future customers. If you don’t market your prospects and target market, people may not know they have a problem you can resolve or might not be aware that they have a desire for a product you can offer.
7-8% of Your Revenue or More?
In finances, you’re educated to allocate between 8-10% of your revenue stream towards your marketing efforts. This might be a sound strategy if you’re an established business with a solid client portfolio and steady sales. But what if you’re a start-up up and working with a tight budget? Or if you’re about to launch a new product/service which requires you to gain a great reach and frequency rather quickly?
Another rule of thumb advised by the US Small Business Administration (SBA) is to spend 7-8% of your sales if your total revenue is less than 5 million annually. However, it depends on the industry and size of the business. For instance, B2C and retailers typically spend way more than B2B companies, and I’ve encountered situations in which they might spend more than 20% of the overall revenue.
Determine Your Desired Cost-Per-Acquisition (CPA)
In most cases, the market is very unpredictable and the only way to determine what your budget should be is to pin down what your CPA (cost-per-acquisition) or CPL (cost-per-lead) must be and next carefully test out some different marketing channels, monitor the performance closely and determine whether it provides you with a sustainable ROI.
The return on your marketing investment should of course be increasing sales and hopefully double or triple your money back, but my point is whether 7-8% of projected revenue is enough to succeed.
Sure you can make estimations and rely on market research or studies that reflect your industry. Even your CFO or financial advisor can inform you of how much they recommend spending, but the actual cost for you to successfully penetrate the market will remain unknown until you test out different channels and identify which one is the most efficient and matches your business objectives.
Brand Awareness vs Direct Response Marketing
For most small businesses the main strategy is not to build up brand awareness or position your product in front of every American consumer. Leave this challenge to the big boys in the Fortune 100 companies.
Since small businesses’ owners typically don’t have the same marketing budgets they instead strive to create marketing campaigns specifically designed to generate direct response, either a sale or a lead at a profitable rate. In other words, an action in which you can capitalize on in the near future, which will essentially help your business grow and slowly build up a recognized brand in your local community or even nationwide.
Include All Your Expenses in Determining Your CPA
In order to succeed with this approach, the first thing is to start with the end goal in mind and determine what the maximum CPA should be for your business model to be sustainable. Consider all your overhead expenses, the profit per sale, the value per client, repeated business, etc.
Once you’ve given this some serious thought and the desired CPA has been determined, you can start exploiting different ways to market your products/services – just be sure to allocate an adequate budget to gather statistically significant data and you can later determine whether or not it’s the right marketing channel for your business and whether the budget should be moving forward or not.
So Which Marketing Channels Should I Choose?
Make sure you choose profitable marketing techniques that will help your business in the long term. For instance, I’ve heard from many business owners who chose to sell their products relying primarily on coupon deals and promotion sites, who ended up creating a downward spiral for the business because their audience never got loyal to their company/brand. They only ended up selling when the product was offered with the same or further discount which gave the business owner a terrible markup.
This is why I’m such a fan of pay-per-click advertising and in particular of Google AdWords because it allows you to cost-effectively present your products or services in front of your target audience in a flexible way. With Google Analytics in place and well-defined goals, you’ll have a crystal clear picture of your CPA and you’ll know how much to distribute towards marketing, whether it’s 5, 10, or even 20% of your overall revenue.
Consistency and Focus Produce The Best Results
Of course, PPC advertising is not the holy grail of marketing nor is it a get rich scheme, but if you’re consistent with your efforts and give it time (6-12 months) it will typically yield satisfying results. Bottom line is that your marketing investment will require money up front and a good portion of discipline.
It will always be a calculated risk when seeking new avenues for advertising but if you crunch the numbers and favor the cost-effective marketing methods, as long as it’s profitable there should be no limits to your ad spend.