“How much should I spend on marketing?”
I get this question a lot as both President of ChapterTwo Marketing & Public Relations and as a SCORE volunteer. Unfortunately, most of the guidance floating around on this topic consists of nothing more than advice passed down through generations or simply numbers pulled out of the air.
Therefore, I want to give you some professional benchmarks and a tool that I often use as a starting point.
The Small Business Administration (SBA), perhaps one of the most credible of agencies dealing with small businesses, suggests that those with revenues less than $5 million should allocate 7-8 percent of their revenues to marketing, split between brand development costs and business promotion.
This is, of course, a simplification, but at least it comes from an expert source. Other benchmarks you may have heard are 5-7 percent, 10 percent, even as much as 30 percent. In reality, it all comes down to your particular goals and situation. There is no “one number” that works for everyone.
What I normally use to start these conversations is a method that normalizes numbers and provides a benchmark. It circumvents apocryphal advice and considers factors such as your revenues and fixed costs — you know, your actual business situation. This was passed on to me some time ago by a friend who runs an international agency, and it’s one of the best I’ve seen:
Step 1: Take 10 percent and 12 percent of your projected annual gross sales and multiply each by the markup made on your average transaction. (It’s important to remember that we’re talking about gross markup here, not margin. Markup is gross profit above cost, expressed as a percentage of cost. Margin is gross profit expressed as a percentage of the selling price.)
Step 2: Deduct your annual cost of occupancy (your rent) from the adjusted 10 percent and 12 percent numbers from Step 1.
Step 3: The resulting number represents your minimum and maximum allowable ad budgets for the year. You may discover that you’ve already spent your ad budget on expensive rent, or you might learn that you should be doing a lot more advertising than you have.
You may have noticed that this calculation follows some old logic: “Location, location, location.” The assumption here is that expensive rent means better location and therefore more exposure, signage, resources, and networking opportunity. This, in turn, means less expenditure on marketing and advertising. Therefore, a shop in New York will spend less on advertising than a shop with similar revenues in Peoria, Illinois. Someone with a home-based business with no location equity, following the same logic, pays comparatively more to make themselves known.
This method is by no means a cure-all for everyone. It’s meant to be used in conjunction with a critical analysis of your goals and your current business situation. You have to also consider factors like industry, business size, and growth stage. For that, I recommend seeking the help of an objective marketing expert. The method does, however, give you a high-level benchmark for considering your marketing budget.
Now go forth and do great things. And tell them I sent you.