Budget season is officially here, which means federal, state and local governments, big corporations, and small businesses alike are all hunkering down to create and approve budgets for the coming year. When it comes to allocating percentages of spending, one of the most difficult categories for businesses to nail down is also the one that is most challenging to quantify: marketing.
Small business owners want to know: How much should I spend on marketing this year? Unfortunately, the answer is: it depends. Use these three key factors to determine your marketing spend for 2016.
Factor Number 1: Your Industry
A common approach to allocating marketing dollars is to calculate a percentage of your business’s projected gross revenue (say, 10 percent) and divide that money among the various initiatives (called the marketing budget ratio). But exactly what that percentage should be depends heavily on the industry you are in. The retail industry, for example, invests more in marketing, on average, than other sectors.
Consult with your industry trade association; these groups often collect data on marketing budget ratios and can provide benchmarks to guide your plans.
Factor Number 2: Your Size
Size is another factor business owners should take into consideration as they determine their marketing budget. An independent boutique with less than three employees will not dedicate the same percentage of its budget to outreach efforts as a multimillion-dollar tech firm.
According to the Small Business Association, in general, “Small businesses with revenues less than $5 million should allocate 7 to 8 percent of their revenues to marketing.” Unfortunately, that is not too helpful for the mom-and-pop shop that earns well less than $1 million a year.
Plus, that SBA figure “assumes you have margins in the range of 10 to 12 percent (after you’ve covered your other expenses, including marketing).” Accountants and other financial professionals can help small businesses calculate their current and projected margins to determine a healthy (and productive) amount of funds to put toward marketing.
Factor Number 3: Your Life Cycle Phase
A major consideration for creating a marketing strategy and budget is stage: Is your business in start-up phase? If so, your budget for year one or two might be closer to 20 percent of your anticipated gross revenue. On the other hand, more mature businesses in markets with little to no competition might dedicate very little in the way of funds or efforts to conducting outreach and cultivating new customers.
Which phase your business is in will also determine how you allocate your marketing budget between brand development costs (website, brochures, blogs, etc.) and business promotional costs (events, advertising, etc.). At different stages, different specific marketing investments will be more important to your business’s growth.
When you look at average budgets, try to research companies within your industry, at the same stage of development and of a similar size to yours. And keep in mind that when it comes to marketing, it is better to spend wisely than to spend any specified amount.