Define marketing budget based on business objectives

Throughout my years of working with small business owners, “How much should I spend on marketing?” is one of the questions I get asked the most.

Is 10% of my total income too little? 20% is too much?

Unfortunately, the rules are not hard and fast. As a result, most small business owners are just marketing in a hurry.

One month they could advertise with Google AdWords. The next day, they might try Facebook. And the next month, they might advertise in a local publication when a friend suggests it worked for him.

Or they just don’t market at all. And in the long run, it’s disastrous.

So how do you know how much to spend? Use two main approaches:

1. Percentage of sales. Some companies set aside a certain percentage of total sales for all of their marketing activities, including advertising, public relations, brochures, social media and trade shows.

In other words, if your handmade furniture business had $200,000 in sales in the past year and you have 5% set aside for marketing this year, your total marketing budget would be $10,000.

Budgeting this way is tempting. After all, it’s easy.

But it is also arbitrary.

You can spend too much or too little. For example, some companies such as Costco hardly advertise at all.

Advertising is not necessary for the success of the giant warehouse store, and it works with tiny profit margins.

At the other extreme, online contact management company Salesforce.com spent $25.4 million on marketing in its first year of business with just $5.4 million in sales, or 470% of his income. This expenditure has paid off as its annual sales are now in the billions.

In practice, the majority of established businesses annually spend 1-15% of their total sales on marketing. It’s a wide range: for a million-dollar company, the figure can range from $10,000 to $150,000.

2. Goal-Based Budgeting. With a goal-based marketing plan and budget, you need to define your business goals and develop an action plan.

If you’re aiming to secure 200 new customers, what will it take to acquire them? How much publicity do you need? At which fairs should you exhibit? Do you need to hire a social media marketing specialist?

This type of marketing budget makes the most sense. It is also the one that requires the most work.

Sure, you may need to cut expenses to meet the realities of your small business finances, but at least the budget is based on what’s needed to achieve your goals.

In your own business, what factors can help you determine how much to spend?

• Your profit margin. If your profit margin is low, you can only spend a small percentage of your income on marketing.

Examples of such businesses include grocery stores and discount stores. On the other hand, companies with high profit margins can spend a much higher percentage.

If you don’t have to spend a lot of money on manufacturing, inventory, or high rent (say you’re a software, web-based, or services company), you can spend more on marketing.

• Large or hard-to-reach market. If you are ambitious and trying to reach a very large market, you will need a big marketing budget.

That’s why I recommend small businesses to target smaller markets such as specific industries or geographies because the cost isn’t as high to reach your leads.

• Novelty. If you’re trying to get started, get noticed, or gain traction, you’ll be spending a higher percentage of your total dollars than you’ll need once your business is established.

Yes, start-up revenue is low, but your need to build a customer base is critical in your early years.

• Aggressive competition. Let’s face it, if your competitors are spending a lot of money on marketing, you’ll probably have to spend a lot too.

Here’s the most important rule: Make a marketing plan, set aside a marketing budget, and spend it.

You need to market your business.

Among Rhonda Abrams‘ recent books is the 6th edition ofSuccessful business plan: secrets and strategies. Sign up for his free newsletter at PlanningShop.com. Twitter:@Rhonda Abrams.