How much should a small business spend on marketing?

All online marketers have one thing in common: a plan to boost their investment in at least one digital marketing approach. The problem with small businesses is not having knowledge of budgeting for their online marketing strategy. Every online brand should do marketing to draw customers, boost sales, and compete much better. Setting up the right funds for marketing and advertising is a daunting challenge for most small business owners because of the various ways to address the duty.

Initially, many small businesses depend only on networking and word of mouth to gain customers. This might just be enough to have a business going, at least for a little time. However, there will most likely be a time for a CEO to want to improve their gameplay. If this point comes, free marketing won’t be enough anymore. A business owner may already know the type of advertisement to invest in, depending on the attitudes and affairs of their possible customers, but what they probably don’t know is the rate of their profits to spend on marketing to drive in more traffic.

You wanted to read this blog post because you wanted to know the exact amount of money you should spend on your small business’ marketing approach. However, no one actually knows intuitively how much to spend on their business marketing. The good news is, you can estimate the right budget for your business by yourself. In this article, you will be guided on how to properly do that. We will give you the formula upon getting the right funds for your brand’s advertising.

The Right Way of Calculating The Funds For Your Marketing

  1. Examine your industry

In the shortest words, your marketing funds should be a percentage of your revenue.

To really learn the recommendation, let us first know the meaning of ‘marketing budget.’ Your marketing budget is all the expenses for marketing, promotion, public relations, advertisements and anything else you can put under the term ‘marketing’ on a daily basis. The most known examples of this are Google Ads, social media marketing, print ads, sponsoring, collateral, and even tastings.

The budget fit for you depends on your current marketing foundations. However, as a general rule based on the newest research, expert ideas, and years of marketing expertise, we believe that you should spend two to five percent of your sales revenue on marketing.  

If you are making less than $5 million each year in transactions and your net profit margin, after every cost, is in the 10 percent to 12 percent range, the U.S. Small Business Administration advises that you spend 7 to 8 percent of your gross revenue for marketing and promotion.

  1. Always include rent

Maybe you are asking why you still need to include rent when we already gave the two to five percent of your sales revenue on marketing.  The reason for this is advertising. It might not be obvious to some, but where you are located is already advertising on its own. If you give a lot of money for rent, that means that you are in an excellent place. It is visibility for your brand in the streets. If your storefront is only in your house or in a location that is not easy to look for, then you better be ready to spend more money and effort in online advertisement.

  1. Study the actual formula

Entrepreneur.com says that there is a formula that practices your proposed gross annual profit and your rent to find out how much you should spend.

What is the formula? How do you do that?

First of all, you measure the low end and the high end of how you should be paying. These two digits are 10 and 12 percent of your projected annual gross sales. If you think you will make $1 million, then if you calculate it,10 percent is $100,000, and 12 percent is $120,000. Not that hard, is it?

Second step: you multiply each of these two numbers by the margin you gain on the average sale. This means gross markup over price, expressed as a percentage of the expense. So if you spend $100 on each widget but sell them for $150, you will get 33 percent as profit.

Then, by its cost, you divide the gross profits. For example, if your gross earnings are $333,000, you would divide it by $666,000. 0.5 is what you get in the calculator, or in other terms, 50 percent. This indicates that your 33 percent margin depicts an increase of 50 percent.

Lastly, you need to multiply the profit percentage by $100,000 and $120,000. This will give you $50,000 and $60,000. Let us say you have $25,000 for annual rent. You will subtract your rent from $50,000 and $60,000. This will give you between $25,000 and $35,000 on marketing as your concluding spending span.

Conclusion

The thing is, we can’t give you the exact expense you should spend on your small business’ marketing efforts. That’s because it’s you who will do that. Our purpose here was providing you the ways to determine the right budget for you.