How much should a small business budget for marketing?

Two weeks ago I attended the Lakewood Ranch Business Alliance monthly membership luncheon featuring Corebrand CEO, James Gregory, who spoke about the importance of measuring the effectiveness of your brand. In my opinion his remarks were poorly received by the audience of small business owners, marketers, and financial people as he cited big-budget examples of the highly technical market research he uses to track well-known brands.

Expressing this frustration one audience member asked, “How much should a small business budget for marketing?” His answer avoided the subject and reiterated his point that every business, no matter what size, must make an effort to measure their marketing communications. Without empirical data, you’re left with only emotional arguments when it comes to establishing your marketing budget and managing your marketing investments. While that is true, in my experience most small businesses don’t even have a marketing budget, let alone a line item reserved for market research.

Earlier this year I spoke about marketing budgets at another Lakewood Ranch Business Alliance event held in conjunction with the Central West Coast chapter of the Florida Public Relations Association. I offered some insight into to the all-important question about how much should a small business budget for marketing.

The short answer is ten percent of gross revenue. Some people will argue that number is too much, and others may say that’s not enough. Both may be right, because the long answer depends on a number of variables and what’s included in a misunderstood term like marketing.

Examples of variables include your type of business, the size of your market, your stage of growth, your profit margin, whether or not you’re introducing a new product or service, and unique business cycles that affect your revenue.

All of these factors can significantly impact your marketing budget. The point is your marketing budget should be defined as a percentage of your annual revenue. And whether it’s two percent or ten percent doesn’t matter. The important thing is to actually have an annual marketing budget, one you plan to spend every year.

Once you establish your marketing budget, the next step is to prepare your marketing plan, but before we get into that, let’s clarify what’s included in the broad subject of marketing. For those of you who took a marketing class in college, does anybody remember the four P’s of marketing?

1. Product
2. Price
3. Place
4. Promotion

The big misnomer when it comes to marketing is that people simply think of advertising. That’s because the fourth P is the sexy one. It’s the Mad Men effect. People are drawn to the creativity of well-written copy, the appeal of a strong layout, the emotional connection of persuasive communications.

Marketing, however, is so much more. The first P refers to the product or service you’re selling. As you might imagine, this P has broad implications. From the color of your widget and the way it’s packaged, to the minutiae of your service offering and the warranty that comes with it, marketing, as it relates to your product or service, is not only about what you have to offer, but how you create it.

Let’s say you have a software company and you want to sell your software to a particular type of business in order to automate a particular business function. Exactly what your software does and what programming language your developers use to build it are marketing decisions.

For another product example, let’s say you have a restaurant and you want to sell a particular type of food to a particular type of customer. Burgers and fries versus soups and salads is a marketing decision. Likewise Angus beef versus ground chuck is another marketing decision.

Here’s one more example for a service business. Let’s say you want to sell insurance or provide other financial services. Do you set up an independent shop or sign on with a big wire house? Which products will you offer (auto, home, life) (annuities, mutual funds)? Which brands will you represent? Once again these are all marketing decisions that fall under the first P.

The P in Price is just as important when it come to marketing decisions. Is it your intention to be the low-price alternative or the high-end solution? My wife and I just got back from Mexico. We booked and all-inclusive vacation online that included our flight on Spirit Airlines. For those of you who know Spirit know they offer cheap fares, but they gouge you with luggage fees that can add up to more than the cost of your flight.

This is a good example of the second P in marketing. They have positioned Spirit as the ultra low fare airline. How do they make that sound like a good thing? According to the About Us page on their website, “Spirit Airlines empowers customers to save money on air travel by offering ultra low base fares with a range of optional services for a fee, allowing customers the freedom to choose only the extras they value.”

That sounds pretty good, right? Of course in Spirit-speak ‘extras’ include everything from choosing your seat, to checking your luggage, to bringing a carry-on bag, and of course snacks and beverages. They’ll even charge you for a pillow.

Place is also critical to every marketing decision because it determines who will be your target audience. The third P of marketing refers to distribution, or how your products are sold. Direct sales might involve a retail operation, an online store, or a team of traveling salespeople. In turn, wholesalers are concerned with a different audience. Rather than dealing with the end-user, their marketing decisions are focused on retail buyers or resellers in the case of a dealer network.

Getting back to everybody’s favorite P, promotion is far more complex than what you might think of as traditional advertising. Yes, it includes broadcast media (network and cable television, radio) and print media (newspapers, magazines and trade publications). It also includes a myriad of other media, from newer forms of digital advertising (email, text messages, banner ads, and search engine optimization) to tried-and-true methods like trade shows and direct mail.

With so many decisions crammed into the four P’s of marketing it’s not surprising most small business owners simply skip the entire planning process and fly by the seat of their pants. But the purpose of this remedial blog post is not to initiate the uninformed; it’s to show that if you’re already in business many of these so-called marketing decisions have already been made. The irony is the fun and sexy part of marketing, the fourth P, is the part that really needs annual attention to be effective. Hence the need for an annual marketing budget and an annual marketing plan.

Rather than argue about the percentage (we can review examples of ten percent marketing budgets in another post), let’s get back to what should be included in your annual marketing plan. Put simply, your marketing budget should include everything you spend to promote your business. The plan is how you’re going to spend the money.

As with most small business expenses, the largest portion probably goes to people. Whether it’s a portion of your time as the business owner, or a percentage of an employee’s time, or an entire internal marketing department, the first line item in your marketing budget and the most important part of your marketing plan is staff.

It’s important to note here that if you do not have the time or talent inside your business, you should hire a marketing company for some or all of your marketing needs. That is what we do at Milestone after all! : )

Beyond the people part of the equation, I always break marketing plans down into three big buckets; print marketing, web marketing, and event marketing. Depending on the size of your budget you can always break the buckets down further if needed.

The print bucket includes all your traditional marketing and tangible stuff such as business cards and brochures, advertising and public relations, even signage and specialties. There may be many exceptions depending upon the complexity of your marketing plan. Perhaps you need to advertise on TV or on the web. Or maybe your PR plan calls for a press conference. These are exceptions to the ‘print’ aspect of this bucket, but for most small businesses the expenses associated with these exceptions far exceed the annual marketing budget.

The web bucket includes all your digital marketing and electronic stuff. This includes your company website and related online marketing needs including search engine optimization, social media, email marketing, etc. I would also include video productions in this bucket if that were a requirement of your marketing plan.

Finally the event bucket is reserved for your face-to-face marketing efforts. For most businesses this includes annual membership dues and participation in various networking groups and professional organizations. It may also include trade shows and corporate events, and it’s important to note your budget should reflect all the costs associated with these events including travel, housing, per diem, etc., not just the space rental and your exhibit.

In summary to the question, “How much should a small business budget for marketing?” of course the answer is it depends. As such I shouldn’t blame Mr. Gregory from dodging the question. Speakers usually don’t want to pick a fight with their audience by throwing out a potentially inflammatory number like ten percent of gross revenue. But since we’re in the private comfort of this blogosphere, I have no qualms engaging your debate.

Until next week,

Matthew Anderson, President
Milestone Marketing Associates, Inc.