It’s a question that haunts many a start-up or small business owner: how much should a small business spend on marketing? Studies suggest if you’ve accelerated growth targets, it’ll suck cash. Is that really such a surprise? In a widely quoted Harvard research study, it’s recommended that high-growth start-ups spend between 20-50% of their revenue on marketing. What? Are you crazy? How do they eat? Well, entrepreneurs know accelerated growth comes at a price. Post this kick-off stage, you should have enough momentum to settle into the average: 7-15%.
However, you might be feeling like many businesses do when they first start out. There isn’t really much revenue. Maybe even nothing. No dollars. Ziltch. Only a data constricted forecast. And so, these percentages can hurt the eyes. I know, it hurts.
Most small business marketing advice assumes you have some cash to splash on a marketing specialist or that you’ve hired an internal generalist, or perhaps a junior hoping they’ll grow with your business. But for small firms starting out, there’s a difficulty in attracting and affording qualified support so initially the founder becomes the DIY-er, their own ‘expert’, simply because they can’t afford the specialists.
This slows down your growth curve, but that’s ok, as long as you accept it and stop punishing yourself for not moving from zero to hero, faster. Bill Gates didn’t get there overnight either, so just relax.
To understand how much to spend on marketing as a small business, it’s helpful to look at the patterns of small business. Yep, there is a pattern.
The story goes like this:
The small business owner begins their business. They deploy savvy networking – both online and offline, drawing most of their business through referrals or reputation-related strategies. Their focus at this point of their small business journey is product or service quality, function, price and delivery. Everything is driven by elbow grease – their ability to roll up their sleeves and tackle challenges head-on.
Nothing wrong with that.
However, it’s only so scalable as a strategy isn’t it? At some point, the small business owner needs to break through the threshold and direct some of their hard-earned cash into paid channels or expert advice.
Think of it like this: you’ve two ways to draw people to you: either by paying for the attention or by earning it. Most businesses use a combination of both.
Either pay for the attention or earn it.
When you’ve limited resources, you’ll work to earn attention. PR, SEO, social media. They’re your friends. If they are not, suss them out. They could do wonders for you.
But what about what you should pay?
There are formulas that help you more accurately calculate how much you personally should spend for your small business. Obviously, percentages from research studies are generalised advice, covering a wide range of industries, then blended into a recommended average.
For example, if you have a high margin (80% to 90%), you can invest more than if you have a lower margin (10% to 20%). If your customer’s lifetime value goes on for years and years, you can afford a higher Cost of Acquisition compared to the company that sells what’s typically a one-time purchase.
Formulas to calculate how much to spend on marketing for SMEs
Formulas help us make sense of so much right? And, they aren’t reserved for chemistry class either. Here are some useful formulas to calculate how much to spend on marketing for small businesses…
Work out your current Cost Acquiring Customers (CAC):
Sales and marketing expenses (no salaries or office expenses) divided by total new customers acquired (or planned to be acquired).
Desired increase in revenue + average annual revenue per user X by CAC (Cost Acquiring Customer), divided by customer retention rate = annual marketing budget.
And that’s how much you should spend on marketing right now.
Ok, so what if that number doesn’t sit right with you? What if you are in a pandemic? Or a recession?
Well yes, in 2021 marketing budgets as a percentage of revenue fell to their lowest level during the pandemic years, but this is NOT recommended by marketers. Oh, we’re biased? Well yes, yes we are, but there’s also plenty of data on why this is a bad idea.
I don’t have time to dig into it here but to sum it up, basically, when your competitors pull spend out of the market there’s a market opportunity for you to build your brand at a lower price. Vegemite did it during the Great Depression, Netflix did it, so did Lego, during the financial crisis of 2008.
Read more about that on Harvard. Of course, if you can’t, you can’t, but I do smell opportunity when competitors cut their spend.
Ok, so back to what you should spend on marketing on your small business journey…
Invest enough to be competitive
There are plenty of tools out there that can help you suss out what your competitor is spending on channels like Google Ads. SEMrush for example, Spyfu, or a marketing specialist can do some market research for you. If you can’t invest as much as your competitor, accept you’re likely to experience a slower growth curve. Right? Right then.
Monitor Reactive Selling
As your number of customers grow thanks to your product or service reputation, you’ll start to find your product and delivery locations expand too. You’ll start to formalise your collateral and processes because new business is increasingly coming from loose introductions. And so, what is typically an informal marketing budget is allocated towards formalising information on products, price, and sales spiels.
It’s kind of reactive.
You’re not exactly hunting for customers, you’re reacting to enquiry and demand. Start measuring resources spent so you can put numbers to it. It’ll help you when planning your budget allocations. The accumulated experience of dealing with inquiries will help you form a less reactive, more controlled sales process, and in turn better inform your marketing budget.
Reactive marketing is fine, as long as competition is minimal and there is buoyant demand. But, what happens when these sources begin to stagnate?
You move to this thing we call transactional marketing…
Transactional marketing is high intent or sales based. Like an ad on Google promising the fastest locksmith in a locality, or a 50% off campaign. It’s based on someone already needing the service or product, and you presenting your business at what you hope is the exact time of need.
Usually, you get to this point in your business because your earlier tactics are running a bit dry, your competitor has finally noticed you, your niche is exhausted, you’ve actually got ‘followers’ or you expanded quicker than expected so now have excess product to sell. To elbow your growth, you start to offer special deals and sales on your product or service using paid channels.
It’s this pressure that can bring about a fundamental change in attitude toward marketing. Up until this point, you’ve felt like you didn’t need ‘fancy marketing’. It’s no longer so suspicious, but maybe something you need. You can no longer DIY, but you need a marketer or agency to take it off your plate.
This change in attitude toward marketing is critical to the growth of small businesses. It’s when you start to think about hiring a marketing person. Usually, the budget considerations are for a junior marketer to hop in and take over all you were DIY-ing.
But, will there be enough activity to justify their employment?
The catch-22 is that you need to spend to grow, but you need more growth to spend.
So, you continue DIY-ing.
But you are NOT a marketing expert (no offense) so you utilise marketing channels in an um… unexpert manner. You feel like it doesn’t work. You’re frustrated. This is your money you’re risking, after all. And it’s supposed to work. Damit.
Marketing performance herein lies not on how much you spend, but your aptitude towards using that spend.
Tentatively, you experiment with low numbers to see what may or may not work. You may allocate a short trial and low budget towards SEO or social media advertising. Or hire a small business marketing consultant for advice. You look for recommendations on how much you should spend on what medium as a small business.
You may choose to work with specialists at this stage rather than a broader agency, as you’re still suspicious a do-all marketing agency may not value your spend. Nobody wants to be treated like a small fish after all.
Or, you look for an agency that promises they’ll be your outsourced marketing department. This can pave the way to an integrated marketing strategy.
For many small businesses, they swap between the two.
Now, you look for what traction you are gaining via channels or individuals you work with. You start to appreciate what works for you, perhaps Paid Per Click Ads on Google search, or PR. Short trial periods of various means govern your investment into them. The experimentation means your marketing at this stage can be spasmodic, channels essentially operating seperately rather than cohesively.
For some small businesses, they may find they are experiencing enough of an increase in sales at this point that they decide they’re just fine ‘without any other fancy marketing’.
The thing is, you’ve only just dabbed your toe into the waters so-to-speak. Imagine where you could go with expert help.
Most small businesses do move beyond this stage in order to continue growing. The difference in growth rates is attributed not so much in how much a small business spends on marketing, but the ease of which they move from DIY, to expert help.