Marketing budget best practices for small businesses

"Yay, it's marketing budget season!" Said no one ever. (Except maybe me).

From September through the holidays (and sometimes earlier), companies are busy planning for the following year, including determining marketing budget and staffing needs. It’s a big deal and can affect everything from day-to-day business operations to investment in other areas of the company.

For smaller businesses, every dollar counts, so coming up with a realistic marketing spend that makes an impact on your company’s bottom line is paramount.

Below are strategies for developing a small business marketing budget that works, as well as tools to help you measure the impact of your marketing.

How Much Should My Small Business Spend on Marketing?

The first step, of course, is knowing how much to spend on marketing. Many business owners have no idea, while those that do may not know what marketing tactics to spend it on. A too-high marketing budget will sap resources from other important aspects of your business, but a budget that is too modest could result in missed opportunities to gain attention, build brand value, and increase sales.

It’s worth mentioning here that a marketing budget by definition does not include sales and business development costs, though there is some overlap. For example, a marketer will develop social media messaging and print materials to support the sales team’s presence at an event, but the cost for the reps’ travel and accommodations is traditionally a sales expense. It depends on the company, but this delineation is important to keep in mind as you hire and acquire resources.

How much should small businesses spend on marketing per year? The general rule of thumb is to calculate it based on revenue.

A marketing budget of 2-5% of annual revenue is common, though much higher percentages aren’t unusual—even in the double digits—especially in more competitive industries or B2C, where the cost to stand out is that much higher.

So if your company earned $1 million in revenue last fiscal year, it’s reasonable and even recommended to spend between $20,000 and $50,000 on marketing. This is consistent with stats from the Business Development Bank of Canada, which reports that small businesses in Canada spend between $30,000 to $100,000+ per year on marketing (not including salaries – more on that later in this post).

How Should I Determine Marketing ROI?

At the end of each year, your marketing spend can be adjusted depending on the results generated. This is where a return on investment (ROI) calculation comes into play. This will tell you how much revenue is generated for every dollar spent on marketing. At its most basic, this looks like:

The calculation will give you a ratio showing by which percent your sales increased relative to marketing spend. Obviously, you’re aiming to maximize the revenue earned for every dollar spent on marketing and avoid the dreaded 1:1 ratio – breaking even. For a deeper analysis, look to more complex calculations, like these from Investopedia.

What’s a “good” marketing ROI, then? Using a short-term example, if you spent $100 on Google Ads and made $500 directly from those ads, you have a healthy ratio of 5:1 (or 500%) – for every $1 you spent, you earned $5.

On a big-picture scale, if you paid a marketing consultant $50,000 to outsource all your marketing for a year, and you generated an incremental $250,000 in revenue, you’ve again achieved a good 5:1 ratio. Higher than 5:1 is considered very good, though it’s by no means the norm. Lower than 5:1 is also positive, though again we’re aiming to earn more revenue than we would have with no marketing.

One caveat is that to do even the most basic ROI calculation accurately, you need to have tracking in place to attribute sales from marketing sources.

Marketing automation platforms and CRMs are useful for this. You can record which leads came from which sources – organic search? A gated content piece? A trade show? Measure it all, then follow it all the way to close to track the revenue gained.

That being said, when assessing performance, it’s important to remember that marketing’s job is to generate leads, not close deals (that’s the responsibility of the sales team). If your sales funnel is consistently being filled up with fresh, qualified leads, then your marketing efforts are having a positive impact. But if you’re not seeing the revenue come in, you could have issues on the sales side, pricing that isn’t competitive, or something else (topics for another day!).

Don’t forget to consider sales cycle length as well. If your sales cycle is very long—in some B2B fields, it can be months or even years before a lead converts into a sale—you may not be able to measure marketing performance until long after. And yes, this makes ad buying and booking events challenging because the decision is typically made a year or more in advance.

How Should My Marketing Budget Be Allocated?

Congrats! You’ve determined the dollar figure of your marketing budget. Next, you’ll need to figure out what to spend it on.

A marketing budget can be sliced and diced in limitless ways, and there’s no golden rule for success across the board. It all depends on the business. What’s your marketing strategy? What objectives are you aiming to achieve this year? What specific results to you want to see now and long-term?

Generally, a marketing budget can be broken down into the following categories (this list is by no means exhaustive):

• Events (trade shows, conferences)
• Digital (website, social media, content development, email marketing, SEO, etc.)
• Advertising (digital, social, traditional)
• Public relations
• Print (collateral, direct mail)
• Promotional items (“swag”)
• Market research
• Other (e-commerce, rebrand, website launch, etc.)

Each of these groups can be further subdivided, especially digital marketing, but at the planning phase it’s important not to get too granular early on. Focus on the view from 5,000 feet to get your percentages locked in, then go deeper into the tactical details later.

Small Business Annual Marketing Budget Example

To give you an idea of what percentage might be spent on which tactics, below is a marketing budget breakdown example for a fictitious farming equipment company:

The faux company is a start-up that has received seed funding to grow and scale. Their primary goal is to build brand recognition and increase revenue by selling their equipment to agriculture companies in Southwestern Ontario.

You can see the company is choosing to invest in events and digital. This will allow them to get directly in front of their audience to build relationships (the main way this group does business) while cultivating a strong online presence (needed in the competitive ag arena, as found through competitor research).

Your budget may look similar, or it could be completely different. Companies will also shift their allocation from year to year as their needs change, the market evolves, or marketing tactics gain or lose popularity and/or effectiveness.

It’s a moving target requiring a great deal of experimentation to get it right. And as with anything else, mistakes will happen along the way which you can learn from to improve over time.

Final Thoughts

What’s the right marketing budget approach for your small business? It all depends on what you want to achieve and the resources you have. Just be sure you’re aligning your marketing efforts with your target audience as well as stages of the sales pipeline to get the biggest bang for your buck.

Cheers to a stress-free budget season!