Advertising is an important part of your business expense. But determining what that budget should be is much harder. The U.S. Small Business Administration recommends spending seven to eight percent of your gross revenue for marketing and advertising.
You’ve probably heard from many different sources that it should be a percentage of sales or a percentage of your marketing and sales budget. There isn’t necessarily a set number or percentage that works for every business. It really depends on the type of business you are in and how long you’ve been in business. You may want to consider speaking with your trade association to see what the standard is in your industry.
Let’s start with some basic questions. Are you currently getting good results from your small business marketing? If so, you may not need to make any changes. If not, you may not be spending enough on marketing and advertising. Even if you are getting decent results now, could an increase in spending push your sales even higher?
There are many things you need to consider when determining the right marketing and advertising budget for your company.
Calculate your revenue.
You should determine your gross revenue which is the revenue you receive before any deductions or allowances. You may also want to look at your estimated revenue which is the amount you’re projecting for the upcoming time period.
Company Size
The next thing we need to consider is the company size. We also need to consider if you’re a startup or established business. Startups usually need to spend more of their budget on marketing and advertising as they are establishing their brand and trying to gain loyal customers.
Established businesses usually don’t need to spend as much on marketing and advertising because customers know their name and products and will continue to buy those products or services. A new competitor or product introduction can change that dynamic.
Setting your marketing budget
Percentage of sales
If you’re a new company, you should consider spending 12-20 percent of your gross revenue on marketing and advertising. That may seem like a lot when you’re first starting out, but remember you are an unknown entity and you need to introduce yourself to your potential customers and word of mouth can only get you so far. Once your brand has been established, you can consider lowering your budget.
An established business can usually get by with 6-12 percent of your gross revenue because as we said before your business has a loyal customer base.
A percentage of gross revenue isn’t the only way to set a marketing and advertising budget.
Competitive spending
You may want to see how much and where your competitors are advertising. You may need to spend more to remain competitive in your industry. It’s also important to see where they’re advertising. Are they using print, radio, direct mail or the internet. If you don’t know exactly how much they’re spending you may be able to ballpark the amount by where and how often you see their advertisements.
Objective and task method
You may also determine the objectives that you want to accomplish during the time period. You’ll set your objectives such as increasing sales or driving more customers to your website and then determine how much you’ll need to spend to reach your objectives. It may be that the required budget to reach these objectives is greater than your capacity. This is an indicator for you to reconsider your objectives and advertising activities to make them fit within your budget limitations.
Many small businesses prefer to spend as much as possible on marketing and advertising. This may help you grow your business faster if you have the funds to spend on advertising.
Now that you’ve decided how much you want to spend, it is time to allocate the budget. Develop a strategy. Understand your potential return on investment (ROI), execute your strategy and measure results.
If you’d like help developing a strategy and setting up a marketing and advertising budget, we’re here for you. Outlook Business Solutions offers an array of marketing and sales services from strategy planning to copywriting and public relations. We’re here to help you grow your business and inspire your customers.