How Much Should I Spend on Marketing ?

A Smart Marketing Budget Is the Most Important Things You Can Do for Your Company. So Why Are So Many Small Businesses Scared of It?

A man with a very successful small business recently called me up to tell me that he was ready to take his business to the next level. I ask him what that meant; he responded that he wanted more. I continued to probe, asking him what “more” was. He told me I asked good questions. Then he started to describe his business. He explained that he wanted to get more clients who could spend more money with him, and that he wanted to do it in a profitable way.

Now the conversation was beginning to get productive, because we were talking about a well-defined objective. But all that came to a screeching halt the moment I mentioned that evil word: budget. Budget is a word that most small business owners hate to hear. Even executives at some midsize companies squirm when they hear “What is your budget?”

How can a business run without a marketing budget? There is a mentality out there that if you have a budget you will end up just wasting it, because once you define how much money you are going to spend, it’s as if you had already spent it. But that couldn’t be further than the truth.

Creating an intelligent budget is the most important thing you can do for your business. It’s probably more important than figuring out how to spend it, especially when it comes to marketing. One of the reasons I love digital marketing so much is that it is highly measurable. You can measure exactly what part of your budget is working and what part isn’t, and then adjust the numbers accordingly.

Here are five questions you need to ask yourself before creating a marketing budget for your small business.

What are my needs? Do you need more leads, more sales, more brand awareness? Your goals will help determine where your money should go. For example, if you need to generate leads this month and you start off with an SEO campaign, you’re probably headed down the wrong path. If you want to create long-term brand awareness and you start off with an aggressive Google Ad Words campaign without setting it up right, you might fail.

What are you currently paying to play? If you are running a business, you are currently paying to obtain clients or to get brand awareness. One way or another, this is part of your cost of doing business. If you have sales reps closing deals, for instance, the cost of their labor is set against those new sales. If you have a storefront that costs you £7,000 a month, you are spending perhaps three times what it would cost you to be in an office in hopes of getting foot traffic.

When you understand what you are currently spending on your marketing, it starts to make more sense to have a budget—in fact, you already have one, just one you aren’t completely aware of.

How fast can I afford to grow? Once you understand your needs and what you are currently paying, you can try to figure out how much you can spend on each lead or each sale. For example, let’s say you make £500 off each £5,000 loan and you end up with a restaurant that has taken out four loans over two years. You realise that this client is worth £2,000 of profit to you.

How much of that profit are you willing to give away to get the client? If you say 25%, that means you can afford to pay £500. Now that you understand what you are willing to pay for a client, ask yourself how many clients like that can you afford to buy. If you can afford to buy ten new clients a month, then your budget could be capped at £5,000 per month.

Am I able to take the risk? Marketing is about testing. Say that you decide to designate £5,000 for a marketing budget and that you can only spend that £5,000 if you get 10 new clients. There is no way for you to know if you will indeed get those ten clients unless you spend it—and risk not getting any additional clients. There is always a risk of not getting the ROI you are looking for when you are marketing your business. Some business owners get really excited and put it all on the line with a prayer and hope for the best. They know they can’t afford to take the risk, but they just do it anyway. They often end up going out of business. They blame their loss on luck or a bad market, when in reality they took on more risk than they should have.

How do I minimise my risk? When embarking on your marketing journey, you know that there will be many risks, and that you might fail. Asking yourself how you can minimize your risks is really important, even before you set up your budget. If you can leverage certain technology to help you understand your risks and analyze your results, you can increase your budget significantly and maintain the ROI you need to fuel growth.

Let’s bring it all together by returning to the restaurant-loan company. Assuming that you made roughly £2,000 per client over two years, you were willing to give up £500 for each client. You realise that you are actually paying £400 for each new client brought in through your sales reps, but that growth isn’t scalable. You look at your bank account and find that you have £25,000 that you can spend, but you are not willing to blow that all at once. You need to be sure that you can handle the influx of additional business, so you are willing to take on ten new clients per month. You are willing to risk £5,000 per month in hopes of getting ten new clients.

You create a digital marketing strategy that you test out to minimise your risk—you watch the quality of the leads each week. You start the campaign at £200 a day and quickly realize that it costs you £100 per lead—at £200 a day you are getting two leads a day. The problem is that at the end of the week, you have ten leads and only two of them are likely to close. At the end of the second week, the same thing happens, but you realize something interesting. Those four leads that are about to close have an average loan amount of £20,000 each. Your profit per account is fourfold, and you start thinking about doubling your budget.

Let’s pause. What happened? You started off with no budget and now you have some clarity and some hard numbers to use for future planning.

Now you can see why having a budget is so important. You have a place to start, but you are also able to test it and change the details and methods as needed.