How to create a marketing budget

Startup founders often focus a healthy portion of their budget on marketing so they can grow their client base. They set aside funds for things like billboards, magazine ads, trade show booths, sponsorships, and paid social media posts.

Between the thrill of launching new promotional initiatives and the routine of repeat marketing campaigns, founders and management teams have an underlying assumption that their advertising dollars are being spent wisely. However, this may be a misconception about how marketing works. Some small business owners place blind trust in marketing campaigns that produce an unknown return on investment (ROI).

It’s easy for well-intentioned entrepreneurs to arbitrarily allocate some of their earnings toward marketing. However, marketing spend is best done with a lean and concrete marketing strategy and a budget based on that strategy. With these pieces in place, money put toward your marketing tools and efforts will increase your growth and long-term potential, and will provide a better-documented ROI.

To strategically grow your business, create and formalize your small business marketing budget while also keeping each ad dollar accountable for driving sales and profits. You may ask fundamental questions, such as:

• What is a good marketing budget for a small business?
• What percentage should a marketing budget be for a small business?

This will help minimize waste and establish a healthy marketing budget for a small business like yours.

This article will help you figure out how to create a marketing budget for your small business. To answer these questions and start budgeting correctly, you need to take multiple steps:

1. Evaluate your current marketing efforts.
2. Consider how other companies in your industry advertise and spend their marketing budgets.
3. Experiment, evaluate, and scale your campaigns.
4. Investigate how your marketing spend affects the rest of your budget.

The following tips will set you up to create a better small business marketing budget for your company’s needs.

What you’ll learn:

• How to Determine the Best Marketing Budget for Your Small Business
• Experiment, Evaluate, and Scale Your Small Business Marketing Budget
• Closing Thoughts

First, take stock of your current marketing spend. Here are four steps every company should follow.

1. Check your budget against your marketing strategy. If your marketing strategy centers on the oldest segments of the population, but your marketing efforts are largely reaching millennials or Generation Z, there’s a disconnect. While your marketing strategy and budget are both works in progress, they need to work together, and your marketing efforts will see better ROI when that’s the case.
2. Audit your existing marketing spend. Consider what you already spend each month, quarter, and year, and segment that budget by your different marketing initiatives.
3. Evaluate their efficacy. Set up an analytics dashboard to determine the ROI for each channel. Accurate attribution is key, and over time you can refine your reporting.
4. Rein in your expenses. Pause any efforts that generate negative ROI or that stagnate. Negotiate with existing vendors to cut costs or collaborate to find ways to improve ROI. Go through your marketing expenses with a fine-tooth comb to cut excess and unnecessary costs.

In most cases, you can use your newly optimized budget as your foundation. Now you can build additional marketing investments into the budget. With these steps, you identify the promotional channels that perform well, based on data, which then helps you set your marketing priorities, and you can invest more in campaigns and channels that already generate a positive ROI.

• This is a prudent approach and a lean way to do marketing since the average marketing budget for small businesses varies widely.
• Of course, it’s helpful to benchmark and compare your spend against other companies in your category. The June 2020 edition of The CMO Survey reports that:

    - On average, B2C brands that provide services spend 15% of their revenue on marketing. Their marketing budgets are 14.9% of their overall budgets.

    - B2C companies that sell products spend 13.9% of their revenue on marketing, and their marketing budgets are 17.3% of their budgets.

    - On the other end of the spectrum, B2B companies that sell services allocate 12% of their revenue toward promoting their business.

    - B2B companies that sell products invest 8.3% of their revenue toward marketing.

    - For both B2B product and services companies, 11.3% of their overall budget is for marketing.

Additionally, the survey’s Report of Results by Firm and Industry Characteristics shares the following statistics in response to the question, “What percentage of your firm’s overall budget does marketing currently account for?”

• For firms with $25 million or less in sales revenue, marketing is 53% of the overall budget
• Firms with fewer than 100 employees allocate 46% of their budget to marketing
• Companies that employ 100 to 499 people allocate 33%t of their budget to marketing
• That percentage drops considerably for companies with 500 to 999 employees, which allocate 12% of their budget to marketing

Consider these small business marketing budget statistics to be interesting reference points. Even though the average marketing budget for small businesses can go up to nearly 50% of the total budget, you don’t have to let that dictate your company’s budget.

Smart business owners should instead look to find ways to profitably manage and grow their marketing budgets without setting arbitrary minimums or ceilings on their spend.

Beyond doubling down on marketing channels that consistently drive positive ROI for your business, further growth can also come from strategic experimentation. Without taking budget away from existing marketing initiatives, small business owners will want to allocate new marketing dollars to additional customer acquisition channels.

Below is a simple four-step playbook to do this right:

1. Start small. Spend no more than a few hundred or a few thousand dollars to pilot a new marketing project. Steer clear of five-figure radio, television, or billboard buys unless you’re already spending hundreds of thousands on marketing and have the research to prove this large investment will be worth it.
2. Set goals. Decide if you need your pilot project to generate leads, convert leads, or increase total sales, then determine a specific number of leads or sales you should generate with your campaign budget. Your metrics may vary, but have specific, measurable goals.
3. Track results. Using your marketing software’s analytics and dashboards, gauge your campaign’s ability to drive ROI. Rely on data.
4. Determine next steps. If the campaign proves to be ROI-positive, investigate. Why did it resonate with your customer base? Then find ways to invest further. If the campaign didn’t reach its goals, pause the experiment, reassess, and consider trialing something else.

Ultimately, you want to curb underperforming spend. At the same time, you want to be aggressive in trialing new initiatives. There are always more opportunities to tap into new audiences you may not otherwise have access to with your existing marketing spend.

In addition to optimizing your marketing budget, investing more into ROI-positive channels and campaigns, and experimenting with new opportunities, you also want to consider how your marketing budget impacts other aspects of your business.

• Cash flow. Some marketing initiatives have long lead times and require cash up front, which could mean that you’re paying months in advance for an ad that might start driving sales half a year later. Whenever possible, account for payment schedules and payback periods on each of your campaigns.
• Sales funnel. Most small businesses should focus on lead generation and direct response marketing, which allows them to closely attribute their marketing efforts to actual sales. Over time, though, marketers will want to split their marketing budget across different stages of the sales funnel. A good rule of thumb is to spend 10% to 20% of your overall budget on brand awareness, 10% to 20% on lead nurturing and remarketing, and 60% to 80% on direct response.
• Salaries, software, and vendor costs. Your marketing costs go beyond dollars spent on advertising. To calculate your overall marketing expenses, you should include relevant staff salaries, software licensing fees, and any professional service costs from agencies, contractors, and freelancers.

As you get a better handle on your marketing budget, the best investments you’ll make will include analytics tools and marketing automation solutions that help you analyze your overall marketing performance and streamline repetitive tasks.

Many small business marketing budget statistics, such as those from The CMO Survey, offer a very broad view on how companies of different sizes in different categories spend their hard-earned dollars on marketing. In some industries, social media and influencer marketing is a primary focus. In others, traditional advertising — television, radio, newspapers, magazines, and billboards — still thrives. Then, there’s a whole range of companies that allocate all their budget toward digital advertising, such as display ads, pay-per-click (PPC), social media ads, and more.

While those data points are nice to know, smart business owners understand that their product or service and target customer base may cause them to be an outlier. Rather than establishing your marketing budget based on broad benchmarks, you can instead start with a modest marketing budget that already generates a return on investment and leaves room for experimentation with new channels.