One of the most popular questions we get from our clients is how much they should spend on advertising per month and per year. They want to know what their marketing budget should be and what channels to invest in.
I’m going to tell you how we solidify marketing budgets for our clients. Our agency has worked with hundreds of businesses, ranging from small and medium to large sized accounts. After reading this article, you’ll be more confident in determining the right amount of money to spend for your business on advertising and marketing.
Table of Contents
Start Small With Your Ad Budget
We like to start small when it comes to advertising spend and scale based on data and results. There have been clients of ours that started with a $500 per month budget and have grown beyond $50,000 in monthly ad spend based on strong results [view success story].
Even if you’re an established business with strong revenue and profitability, it’s good to start slow and make adjustments as conversions start to come through. Think of advertising like a Marathon not a sprint.
The beauty of digital marketing is you can start as small as you want and then scale up or down instantaneously. Don’t feel the need to go all-in with your ad budget – even starting with something as small as $10 or $20 per day can yield results. Slow and steady wins the race.
Do you need help solidifying your advertising budget? Contact The Media Captain.
5% Revenue Rule
The U.S. Small Business Administration recommends spending 7 to 8 percent of your gross revenue on marketing [source]. There is also a general rule of thumb that you should aim at spending between 2-5% of your sales revenue on marketing.
- If your revenue were $1 million per year, your advertising and marketing budget should be $50,000 annually based on the 5% of sales revenue rule.
It’s generally a good idea to be reinvesting revenue back into the business through advertising. Acquiring new customers allows your business to grow and helps diversify your business so you’re not reliant on just a few customers. If you only have a handful of clients or customers, if there’s a recession or a downtick in the economy, it could put your company in a bad situation if 20% of your customers were to drop off.
That being said, not all businesses have revenue when solidifying an advertising and marketing budget. Continue Reading: We’re going to tell you why $300- $500 per month is a good starting point for businesses just starting out trying to determine their marketing and advertising budget.
Distribution Versus Creation Costs
Advertising and marketing is a broad category of business expenses. When thinking of your advertising and marketing budget, make sure you diversify between distribution versus creation. You want to make sure you have a budget allocated towards both of these. If J.K. Rowling didn’t have any distribution for Harry Potter, it could be collecting dust on her bookshelf. Let me explain the difference between distribution and creation:
- Money being spent on a specific channel with the intent of acquiring new customers.
- Example: Ad spend going towards channels like Facebook, Instagram, Google Ads and Amazon Ads (to name a few)
- Money being spent on distributing marketing material to a specific audience
- Example: Purchasing an email list with the intent of acquiring new customers through a custom email blast.
- Search Engine Optimization
- We bucket SEO into the distribution category. Although content is created for SEO, the purpose behind search engine optimization is to drive people to your website, so there’s intent of acquiring new customers.
- Money invested into creating marketing materials that will later be distributed.
- Example: Graphic Design and Branding
- Example: Web Design
- Example: Cost of a marketing agency
You want to make sure you don’t spend too much money on marketing creation costs versus distribution. For example, if you only have $10,000 for your advertising and marketing budget, don’t put the entirety of the budget into your logo and branding and website. You should have money leftover after the site is built to invest in advertising so you can acquire customers.
Note: We offer an affordable business starter package for small businesses that combines logo and branding, web design and marketing as an all-in-one service [learn more].
What To Analyze
When determining how much money you should spend on advertising and marketing, it’s important to analyze several factors. Below are critical thinking components that we analyze before coming up with an advertising and marketing budget.
Stage Of Your Business
- Infancy Stage
- Starting from scratch with no revenue or customers.
- Youth Stage
- Very few customers with little revenue. Under 1-year old.
- You’ve been in business for over a year and have customers and revenue to show for it.
- You have a strong customer base and have a proven track record.
Financial Factors and Competitiveness
- Does your business have a recurring revenue model?
- When you have a recurring business model, you can spend more since there will be repeat purchases in the future.
- What are the profit margins of your product or service?
- There’s a big difference if you have a 10% margin on your product or service versus a 50% margin. This should be taken into consideration when determining ad spend and marketing spend.
- How competitive is your industry?
- Competitiveness makes a difference in terms of the cost per click and difficulty to rank well on Google. We like to analyze this prior to launching a campaign.
- Annual Revenue?
- Are you trending up or down year-over-year
- How many customers do you wish to acquire with a $1,000 budget?
- This allows us to gauge what the business owner or marketing manager thinks would be a desirable number for their business.
Starting Threshold: $300-$500 in Ad Spend
Below is the critical thinking we use for solidifying the budget for our clients. You can use a similar rationale when determining the advertising budget for your business:
- If you are a business that falls in the infancy or youth stage, we recommend starting with a $300-$500 per month advertising budget. This budget should give your business enough clicks and data to make decisions in terms of increasing or decreasing your ad spend.
- Facebook and Instagram tend to average around a $1 cost per click. Google averages around a $3 cost per click. A $300-$500 per month advertising budget allows for you to get over 100 clicks to your website, which is enough to see whether or not quality traffic and conversions are coming through.
- The average landing page conversion rate falls around 2.35% [source]. If you were to drive 100 visitors to your site, you should convert between 2-3 of those visitors. It’s important to properly set-up goals within Google Analytics so you can measure the success of your marketing efforts.
- It should be noted that conversion rate and competitiveness amongst each industry varies. For example, for a personal injury lawyer, the average cost per click can be north of $50! A $300-$500 budget may not work for this type of industry due to competitiveness.
- If you are selling a $3,000 product, you’ll likely see a lower conversion rate than 2.35% since you have such a high price point. When you generate a sale, since it’s a higher ticket item, there’s more revenue being generated. In this instance, you’ll likely need to spend more than $300-$500 to prove that the advertising is working.
- If you have an established business, you don’t always need to spend 2-5% of your sales revenue on marketing. You can with a smaller budget to ensure that leads and sales are coming through before scaling.
- There are clients that come to us with a definitive budget, which is perfectly fine. They may need us to spend $10,000 per month based on direction and goals set forth by their team. There’s nothing wrong with starting larger. We just like to be more cautious in determining whether or not sales and leads are coming through before scaling.
- Even with a $300-$500 per month overall marketing budget, you can’t lose sight of distribution versus creation. Make sure you diversify between distribution versus creation.
Choosing the Proper Channels
Picking the right channels is an important component to a successful marketing campaign.
Google, Facebook, and Amazon make up more than 64.0% of all U.S digital ad spending [source]. These channels are a great place to start for your marketing efforts as this is where your customers are most likely to be.
Email marketing to customers and prospects yields a great return on investment and is something we recommend for all of our clients. LinkedIn, TikTok, Instagram, Snapchat, YouTube and Pinterest are also viable channels.
Like I previously mentioned, each business is unique. For an attorney, advertising on directory sites like Justia and FindLaw can be advantageous since these are high-trafficked sites in the legal space.
Start with the powerhouse sites (Google, Facebook and Amazon) and niche down from there.
The most popular services our clients sign up for are the following:
- There’s no one size fits all marketing and advertising strategy. Every business is unique and different.
- We like to start small and scale after proving the marketing campaigns are performing well.
- Picking the right channels and services for distribution is key.
- It’s important to have a skilled marketing agency or in-house person to dictate strategy and oversee the campaigns.
- If you are spending $500 on Facebook and Google Ads and don’t have an expert overseeing the account, it can all be for naught.
- The same holds true for an SEO strategy. If someone is developing a strategy with limited experience, you may be putting in time with little results.
- Marketing combines creativity along with data and analytics. It’s not an exact science. Don’t give up after a month. It takes time to reach your suite spot.