How Much Should A Small Business Spend On Marketing?

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 and lean on a professional's creativity.

Is that really such a surprise?

In one Harvard research study, it's recommended that high-growth start-ups spend between 20-50% of their revenue on marketing. Post this kick-off stage, you'll ideally have enough momentum to settle into the average: 7-15%.

For many small businesses, this equates to an ad spend of $1-15k per month. This should be informed by a deep understanding of your customer journey.

Set marketing budgets are becoming too restrictive for the age of AI

For many small business owners, they're flying by the seat of the pants. (So-to-speak). The good news is, set marketing budgets are becoming too restrictive for the age of AI anyway.

Imagine this: your ads are generating a solid return, but you cap the spend. You're capping your growth in the process.

As long as campaigns are hitting performance goals, investment makes sense to everyone, especially a CFO.

Critical: work with a trusted advertising partner to help you dance around the changes in the advertising realm. It would be short sighted to only invest in transactional ads for example, and negate the uplift brand awareness campaigns can deliver.

The best advertising is like a creative, layered sandwich.

Tip for those with set budgets: keep pace with ad platform changes by allocating a % to experimental strategies.

Start-ups grow through creativity

Formal systems are normally nonexistent when a business is just starting out. The business owner or founders are deeply involved, sometimes too involved, due to resource constraints.

Many shut their doors when these resources run dry. Many don't move past the survival stage to accelerate growth.

Others risk more or become more creative to accelerate growth. Usually, a combination of both.

20-50% to accelerate growth

Entrepreneurs know that if you want accelerated growth, it comes at a price. Research confirms it, but percentage suggestions vary from 20-50%. One things certain: if you're after aggressive growth to secure your market share, quickly, the road is paved in dollars.

Take Monday.com for example. In 2021 Monday.com's SEC S1 statement revealed the SaaS company was throwing over 100% of their revenue at sales and marketing, and grew 95% year-on-year.

An AI-driven world is demanding substantial investment too. AI-driven targeting requires as much data as possible to optimise. This equates to running campaigns with broader reach, and, giving the algorithims enough time to learn. Feeding the AI with broader targeting comes at a price not all small businesses can sustain.

Best tip: Save yourself from stuffing around and work with a pro to maximise your spend.

Marketing performance herein lies not on how much you spend, but your aptitude towards using that spend.

7-15% to sustain momentum

How much you invest will impact your growth trajectory. 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.

Until he went public in '86.

The patterns of growth for a small business

To understand how much to spend on marketing as a small business, it's helpful to look at the patterns of small business.

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, delegation and 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 leverage creativity to earn attention.

• PR
• SEO
• Social media
• Loyalty programs

They're your friends. If they are not yet, suss them out. They could do wonders for you.

Consider the Market Environment

What if you are in a pandemic? Or a recession? How should your advertising budget change?

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, and Lego did it during the financial crisis of 2008.

Of course, if you can't, you can't, but I do smell opportunity when competitors cut their spend. Read more about that on Harvard.

Consider customer lifetime value

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.

Consider Profit Margins

If you have a high margin (80% to 90%), you can invest more than if you have a lower margin (10% to 20%).

Consider a Formula To Calculate How Much To Spend On Marketing

Formulas help us make sense of so much right? And, they aren't reserved for chemistry class either. There are formulas that help you more accurately calculate how much you personally should spend for your small business:

Here's one of them:

1. 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).

2. Then calculate:

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 can give you an idea on how much you should spend on marketing right now.

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.

If you can't invest as much as your competitor, accept you're likely to experience a slower growth curve.

Of course creative strategy can help speed this up.

Transactional Advertising

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 the time of need - usually with the help of AI driven ad delivery.

Most businesses, begin the transactional advertising adventure because earlier tactics, like referrals, are running a bit dry, competition is heating up, you've excess stock or exhausted your niche. 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?

Usually, no.

The catch-22 is that you need to spend to grow, but you need more growth to spend.

If you're smart, you outsource to an independent specialist. Like me. :) I'm nice too.

If you continue DIY-ing you are (usually) 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.

Marketing performance herein lies not on how much you spend, but your aptitude towards using that spend.

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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 in them. The experimentation means your marketing at this stage can be spasmodic, channels essentially operating separately 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.

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.

Most small businesses do move beyond transactional advertising 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.