How to Determine the Marketing Budget for a Small or Medium-Sized Business
Determining the right marketing budget for a small-to-medium-sized business (SMB) can be difficult. You know you need to invest in marketing to build awareness and increase sales, but many business owners struggle to arrive at an exact amount to guide strategy. While the question can be complicated, the answer is relatively simple: it all comes down to a simple formula. Let’s dig into how to calculate the right marketing budget for your SMB, as well as uncover tips and tricks to help you make sure you’re tracking the return on your marketing investment.
Determine Your Marketing Budget
While there are a lot of factors that can go into determining the exact right marketing budget for your business—your industry, your market, and your competition—it’s best practice that your marketing budget should be at least 5% of your total revenue.
$1M in annual sales = $50,000 annual marketing budget
($1M in annual sales x .05 = $50,000)
So how does that budget get allocated? Marketing has many components and where you invest depends on your unique marketing goals, but overall common categories in a marketing budget include:
- Online advertising
- Social media
- Traditional media/advertising
- Video marketing
- Print materials
- Promotional items
You’ll want to allocate more budget to the tactics that align with your marketing goals and are most effective for your business. If you don’t know in the beginning, make an educated guess based on past performance and then regularly monitor and assess. You can then move the budget from one area to another as you learn, such as moving traditional advertising budgets to digital ads if you discover they are performing better for your company.
Understand Key Marketing Metrics
As you get more sophisticated at keeping track of costs and adjusting spend, you’ll want to dig into more granular performance metrics to determine how your marketing investments are paying off. Keeping a pulse on measurements like the lifetime value of the customer and lead acquisition costs will help you know if that original marketing budget should be increased or decreased. Here are some helpful marketing metrics to know and track:
Lifetime Value of the Customer (LTV):
LTV is a measure of the total income (revenue minus the cost of doing business) you can expect to bring in from a typical customer for as long as that person or account remains a customer. It’s found by multiplying the annual average sales of a customer by the average customer retention life.
Lead Acquisition Cost (LAC):
LAC is a metric you can use to determine how well your marketing is performing and how many quality leads you are getting. It’s found by dividing the total investment into strategy divided by the number of quality leads.
Customer Acquisition Cost (CAC):
CAC tracks leads and conversions from a particular campaign. It’s found by dividing the campaign cost by the number of customers realized.
Return on Investment (ROI):
ROI is the holy grail of marketing metrics and helps to ensure marketing investments are paying off. It’s found by multiplying the number of new customers by the LTV to get the total value. Then, divide total value by the marketing budget to arrive at your total ROI.
Let’s walk through an example:
ABC Supply Company has a $50,000 annual marketing budget they invest in their website, print and digital advertising, and e-newsletter. Their average client spends $4,000 a year and an average client stays with them for 5 years. They run one large annual campaign that costs $12,000. It brings in 24 new customers.
- LTV = $20,000 (4,000 x 5)
- CAC = $500 (12,000 / 24)
- ROI = $480,000 (24 x 20,000)
Track Return on Investment
Regardless of how much budget is set aside for marketing, all businesses can benefit from tracking ROI. Proper tracking of your sales and marketing campaigns is critical to ensure that the leads and conversions are a direct result of the money spent on those campaigns, and not a result of normal customer acquisitions such as customer referrals or organic results due to an established web presence. Setting benchmarks helps in addressing these factors as well, so that any new business can be tracked and attributed to the proper source.
Start Now and Iterate
If you don’t have an established marketing budget, it’s best to start somewhere, track, and learn. Establishing a budget, setting up a campaign, and putting proper analytics in place will give you the information you need to determine your ROI and make sure you’re investing the right amount in the right places. If you need help creating a marketing budget, or you’re not getting the ROI on your current investments, contact inConcert Web Solutions. Our team has been guiding businesses of all sizes on budgeting, campaign development, and tracking for decades and we can help your SMB do the same!
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