As a small business owner you probably do not have the budget that large companies have. In some cases you may not have any budget at all. In my practice I more often than not heard the answer “no budget” when I asked what the budget for marketing communication was. In my opinion there is only one case when that answer has nothing wrong with it, and that is if you have more business than you can handle; now and in the future.
In many cases however, the reason why the question came up in the first place, was because the small business owner asked me to help get more customers. And there are a number of reasons why small business fail to get enough customers. Not having the appropriate budget is one of them.
So how high should your marketing budget be? It depends on the size of your business and sales. There are several ways of calculating your marketing communication budget and I will present the budgeting method as advised by the American Small Business Association.
As a general rule, small businesses with revenues less than 5 million dollar should allocate 7-8 percent of their revenues – past or projected (addition mine) – to marketing.
This budget should then be split between 1) brand development costs (which includes all the channels you use to promote your brand such as your website, blogs, sales collateral, etc.), and 2) the costs of promoting your products and services (campaigns, advertising, events, etc.).
This percentage also assumes you have margins in the range of 10-12 percent (this is after you’ve covered your other expenses, including marketing). If your margins are lower than this, then you might consider eating more of the costs of doing business, by lowering your overall margins and allocating additional spending to marketing.
So from that you can calculate how much you – according to the SBA – should be spending on marketing communication. Of course it is no hard and fast rule; you can make your own choices on what you want to budget.
Some quick calculations: If your yearly revenue is 100.000 (in whichever currency) SBA advises your budget to be 7 to 8 thousand of that same currency. If your yearly revenue is 5.000.000 then the advice is to have a budget between 350.000 and 400.000. If your yearly revenue is 60.000 then the budget lies between 4.200 and 4.800 of your currency.
There are some other methods as well. One of them is “What can I afford” method. In my opinion that is not a very good method as you will run the risk of putting the marketing budget last. Which turns the method into a “If there is anything left, I will spend it on marketing” approach. An approach totally overlooks the fact that you need to invest money to make money.
Another method is to benchmark your spending on what your competition does. This has some drawbacks as well, as your competition may be in a different stage than you; you may be new and your competitor may have been in the business for 5 years already. As a startup you may have to spend more. Also you will have those onetime costs like a logo, or a website that your competitor may have already invested in. Also, how do you find out what your competitor spends?
A last method is to determine your marketing goals and set your budget accordingly. This sounds like the ideal method and it is. However, I do not remember a time in my professional life when I said: “if you want to me to accomplish this, I need X amount of money”, that my manager or client said “sure, here is it”. Most of the time the answer was: “I appreciate your input, but the budget is the budget and you have to accomplish your targets with what you have”. Also this in itself requires a certain amount of expertise that you as a business owner may not (yet) have.
A way to have less of a need for a budget is to do most of your marketing communication production of materials – like ads, and brochures, and websites etc. – yourself and not pay someone else to do it for you. The question then however, becomes one of time and of expertise. Do you have the time? And do you have the expertise to market your own business successfully?
In most cases though, you will have to invest money to make money.
By Pepita Bos