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How much should you spend on marketing?

Tuesday, March 04, 2014   By Mike Reddy


In an age where we expect anything we put on the Internet to be free, it's important for small businesses to recognise the value that can come from paying for something.

Spending money on marketing is necessary to run a successful business, whichever channel you use.

So how much should you spend on marketing?  3% of sales?  Last years spend + another 5% perhaps?

Investing dollars in any form of marketing can really bring about some amazing results.

It's a challenge I come across as a small business advisor - convincing business owners that a good message promoted through a good marketing channel can generate profits at a level several times that of the amount invested.

Just don’t expect great results for free - it's nice when it happens but don't rely on it.

Thomas Jefferson said some clever stuff.  One that strikes a chord is, “The man who stops advertising to save money is like the man who stops the clock to save time…”

I don't think it matters if we are talking about traditional marketing such as print, radio and brochures or the online marketing channels such as Google and Facebook marketing and the other paid alternatives.

Small business owners notoriously underspend when it comes to advertising. They see it as a cost rather than an investment.

So how should a small business owner determine a marketing budget?

Marketing should be regarded from a holistic viewpoint. There shouldn't be a separate budget for the spend on brochures from the spend on business cards from the spend on social media.

After all, they are all there to generate profits and need to work together in an integrated way. Therefore focus on getting the right balance to achieve your desired objective.
But, irrespective of what marketing message is distributed on what marketing channel, it is important to settle on a marketing budget. Once the budget has been determined then it becomes a lot easier to decide the best marketing options and what can be expected from it.

I tend to focus on the numbers so the first aspect of marketing plan is to calculate the marketing dollars. Here is my rough and ready calculation that gives me an idea of an appropriate marketing spend for a particular small business.

  • Deduct your annual occupancy costs (rent) from your projected annual gross sales.

  • Calculate both 10 percent and 12 percent of the net figure above, then multiply each of these figures by the percentage markup made on your average transaction. (Note here - the gross mark up, not the margin).

  • These two balances will represent a suggested minimum and maximum allowable ad budget for the year.

Some business owners ask why I deduct rent from the sales.

From my perspective, the rent is dictated by the location and the location is important for marketing. Therefore I see it as part of the marketing allocation.

Paying a low rent and then investing significantly through marketing channels to let people know where you are is all part of the marketing strategy, and is little different from the alternative of paying a high rent in an area with a significant amount of foot traffic and therefore investing a lot less through marketing channels.

So this calculation recognises that an element of the rent is already part of the marketing activity.

Once you have calculated a marketing spend "range" it is then a lot easier to consider a mix of different marketing choices. It is fair to say that in today's world this will probably include a mix of traditional and online marketing channels.

During my business coaching engagements I prefer to work with the business owner to objectively consider each and every marketing channel, consider their likely reach, diversity and speed in terms of getting the message out and how they might effectively work together.

I tend to find that this consideration is useful to ultimately settling on a marketing plan that makes best use of the budget and has the best chance of delivering on the business owners objective.

Mike Reddy is a Chartered Accountant, business coach and advisor helping businesses in Sydney, Melbourne, Brisbane and Gold Coast to easily increase their profits and cash flow. He is currently President of the North Sydney Chamber of Commerce, a Regional Councillor for Sydney North East and a member of the Institute of Chartered Accountants Sydney leadership team. As well as advising businesses, Mike presents business development seminars and webinars and is regularly contacted by the media to comment on small business matters. You can connect with him on Facebook, Twitter and Google+.