How to create a marketing budget for small businesses

Marketing is a crucial component of any business. To gain customers and improve sales, you need to figure out how to effectively promote your products and services to your target audience—and that requires a dedicated marketing budget.

With so many different marketing avenues to explore—from ad campaigns to events—it can be tricky to know where to start and how much to spend. That’s why a marketing budget is essential. Not only does it help you focus your approach, but it also makes it easier to stay on track with growth and spending goals.

Ready to get started? Follow these five steps to create a marketing budget for your small business.

1. Gather information

Before you can build a marketing budget, you need to develop a marketing plan. Examining your sales process and researching your customers can show you which marketing techniques are most effective.

Need some help researching your customers? Check out our comprehensive overview of market research for newbies.

Start by analyzing the data from each step in your sales funnel—from awareness to action. Use customer relationship management software, like Hubspot or Salesforce, or a website analytics tool like Google Analytics to find out the number of site visitors your business sees per month, the number of leads you generate, and the number of leads you convert to sales.

Consider the various marketing methods you use to spread awareness, pique interest, and incite action. How much money and time do you spend on each method, and how successful is each channel? Answering these questions can help you determine which strategies are hindering or helping your overall growth.

Next, get to know your target audience. In addition to studying your current customer demographics, conduct some market research to find out the age range, location, and average income of your target audience, as well as which brands they gravitate toward.

It’s also helpful to understand the habits, problems, and preferences of your target audience since these factors inform which distribution channels will be most successful.

2. Set goals

Goals don’t just provide a framework for your overall marketing strategy: they also dictate your marketing budget. When setting goals, take into account your revenue history and future sales projections, as well as the particular stage your business is in.

If your business is relatively new, for example, you may need to allocate more money toward marketing to gain traction. On the other hand, if your business is more established and has consistently high revenue, you may be able to scale back on certain strategies.

Regardless of your business’ growth stage, you should focus on creating goals that follow the SMART formula—meaning they should be specific, measurable, attainable, realistic, and time-sensitive.

For example, instead of setting broad goals to improve sales or expand your customer base, set goals to boost social media engagement by a specific percentage or increase the number of leads you generate per month from 75 to 100.

3. Organize your financials

It’s important to get an idea of your profit margins and operational costs to determine how much money you can realistically spend on marketing. Start by making a list of your various business costs, including fixed and variable expenses. Fixed expenses include predictable costs like rent, payroll, and insurance, while variable expenses are costs that fluctuate month-to-month, like office supplies, utilities, and equipment maintenance.

For businesses that sell products, the next step is figuring out your cost of goods sold (COGS), or the amount of money it takes to make and sell your products. This includes raw materials, as well as costs associated with packaging, shipping, and storage.

To calculate how much it costs to make and sell your products, use the following formula:

COGS = Cost of Inventory at Beginning of Year + Additional Inventory Purchased During Year – Cost of Inventory at End of Year

From there, you can calculate how much money you’re bringing in using the following formulas:

Net Profit = Revenue – COGS – Expenses

Net Profit Margin = Net profit / Total Revenue x 100

As a general rule, the U.S. Small Business Administration recommends that businesses spend 7-8% of their gross revenue on marketing, assuming they earn under $5 million in revenue and have profit margins between 10-12%.

That said, every business is different. According to Gartner’s 2018-2019 CMO Spend survey, the average marketing budget in 2018 and 2019 is 11.2% of a company’s gross revenue. How much you spend on marketing depends on different factors, like your industry, competitors, goals, financial situation, and internal ability to handle growth.

4. Determine your distribution channels

Your marketing budget breakdown depends largely on your marketing strategy. The distribution methods you choose will fall into one of two categories: inbound or outbound marketing.

Inbound marketing is designed to bring prospective customers to you and includes costs associated with maintaining a website, improving SEO, doing referral marketing, running a blog or other content marketing, or making a custom infographic, video, or case study that promotes your business.

Learn how to get more leads through content marketing for your business.

Outbound marketing refers to any method that helps you get your message or product in front of potential customers. This can take the form of advertising campaigns, billboards, promotional materials, or events.

Compile a list of all your inbound and outbound marketing strategies, then add up the costs of each to see if they fall within your new budget. If not, you may need to reevaluate either your strategies or shift your spending.

According to the Gartner survey, chief marketing officers in 2018 spent 29% of their marketing budget on marketing technology, like digital analytics platforms and content management systems. Other common spending areas include advertising, which accounts for over 21% of marketing budgets, and digital resources like paid search and organic search, which make up 25% of budgets.

If your marketing budget isn’t big enough to cover every area, prioritize the methods most likely to yield the highest returns for your business. You can also focus on low-cost, high-impact solutions, like email marketing and social media.

5. Keep testing and modifying

Developing a marketing budget isn’t a one-time task. As you learn more about your customers and experiment with different marketing strategies, your marketing plan will evolve—which means your budget will change, too.

It’s a good idea to monitor and evaluate your marketing efforts to ensure you’re reaching as many customers as possible in a cost-effective way. At least once every quarter, set aside time to assess what works, what doesn’t, and why.

Use some of these tools to test and monitor the effectiveness of your marketing efforts:

• Google Analytics: Track traffic to your business’ website, where that traffic is coming from, and monitor the effectiveness of specific marketing campaigns
• A/B testing tools: Using a tool like Optimizely, you can A/B test copy, images, and more to see what works best for your marketing campaigns.
• Email marketing service with in-suite reports: Using a platform like MailChimp or Campaign Monitor, you can send marketing emails and see how they perform.
• Social media marketing tools: While most social platforms have their own analytics tools (think Facebook Insights for Business Pages), you can also use third-party tools like Hootsuite or Sprout Social to track your social engagement and campaigns in one place.

From there, consider cutting or reducing spending on strategies that show little to no ROI, while dedicating more money to your most successful platforms. Keep in mind that the best marketing budget is one that grows with your business, instead of boxing you in.

Moving forward with creating your marketing budget

Creating a marketing budget for your business may seem daunting, but it doesn’t have to be difficult. Focus on outlining a marketing strategy first, then continue to play around with your numbers and distribution methods until you find what works.
Build your comprehensive strategy with our guide to small business marketing>