One of the most common questions small business owners ask is, “How much should we spend on marketing?”
Knowing how to set a marketing budget is an important and difficult task. You need to spend enough to reach your goals and keep a steady flow of customers coming to your business. But, you also need to balance your marketing spend with the rest of your business budget.
So, what’s the right amount?
How Much Should Your Business Spend on Marketing?
The answer is, it depends. How much your business should spend on marketing depends on many factors. We can’t give you an exact amount.
But, we’re going to give you a list of questions that can help you get closer to the magic number, and we’re going to give you a starting point.
Consider that a Deloitte CMO Survey found that the average marketing budget in 2021 was 13% of the business’s annual revenue. Use this as a starting point, and then ask yourself the following questions to get closer to the right number for your business.
9 Questions to Help You Decide How Much to Spend on Marketing
Consider the following questions as you determine the best marketing budget for your business.
What’s the average marketing spend for your industry?
No industry is exactly alike. Your industry has unique metrics when it comes to profit margins, competition, and customer lifetime value, among other financial benchmarks. Don’t rely on a basic average marketing budget for small businesses to start your planning. Research to find the average marketing budget for your specific industry.
What are your competitors spending?
While researching the average marketing spend in your industry, try to uncover what your competitors are spending. Knowing their budgets can help you set a benchmark for your own, and it can also help you see how much you need to spend to outshine your competitors.
What is your annual revenue?
Many businesses set a marketing budget by setting aside a percentage of their annual revenue. As outlined above, the average marketing budget is 13% of a business’s annual revenue. To determine a percentage of your annual revenue, you need to know your annual revenue. You need to have a clear view of this core financial metric to know what amount of marketing spend is right for your business.
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What stage is your business in?
A new business that doesn’t have customers will need to spend more on marketing than an established business with a long list of loyal customers. Consider the stage of your business. Are you in growth or maintenance mode? Are you scaling or keeping with the status quo? Will you need to spend more or less based on your stage of business?
What are your goals?
Also, consider your specific goals. If you are planning to grow, how much do you want to grow? How many new customers do you need to acquire to reach those goals? Outline your goals and set realistic expectations for how much money you will need to reach them.
What are your customer acquisition costs?
One metric that can help you assess how much you will need to spend to reach your marketing goals is customer acquisition costs. When you know how much it costs to acquire a new customer, you will be better able to set a budget for how much to spend depending on how many new customers you’d like to bring in.
Related: The 6 Essential Financial Metrics Every Business Owner Must Know
What is your customer lifetime value?
Knowing how much you will make from a customer once you acquire them can also help to inform your marketing budgeting. How will your revenue change as you bring on new customers? As your revenue goes up, how does it affect financial forecasting? Should you spend more on marketing?
If you don’t know how to figure out your customer lifetime value, consider working with a financial partner. An outsourced CFO can help you get the data you need to determine customer lifetime value, along with customer acquisition costs and other important metrics needed to set a marketing budget.
What type of marketing budget are you creating?
The phrase marketing budget can mean a lot of things. As you outline your budget, make sure you know exactly what type of budget you’re setting. Are you creating the budget for the year? A budget for a specific launch? A budget for a specific campaign? A budget for tools you need? Be specific with what your budget will include.
Related: Create a Business Budget In 8 Simple Steps
What’s your marketing ROI?
Setting an initial budget is only the first step in knowing the best budget for your business. Once you set a budget, track your efforts to find your return on investment (ROI). Constantly tweak your budget to make sure you are getting the most you can out of your marketing spend.
Create a More Accurate Marketing Budget
To know how much to spend on marketing, you need to consider a variety of factors. Use these questions to get the information and insights needed to create a more balanced budget for your business.
And if you need help gathering the business metrics that help you determine the best marketing budget, let’s talk.
CFO Solutions can help you get your business finances in order so it’s easy to review financial metrics like annual revenue, customer acquisition costs, and customer lifetime value. Talk to us about how we can help you get a clear view on your business finances. Or, download our free Small Business Financial Planning Guide to start digging into your numbers right now.
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