As a small business owner, there are countless demands on your time, your attention, and your pocketbook. It takes most small businesses two or three years to become profitable and as many as seven or eight years to experience significant growth as a company. During the early stages of a business, it can be particularly challenging to know how much to invest in certain aspects of the company in order to see steady, sustainable growth.
Marketing and advertising is one area where small business owners may be uncertain about how much to allocate and for what types of efforts. In fact, many small businesses rely primarily on word of mouth marketing during their early years. One recent survey found that more than one third of small businesses spend less than $10,000 on advertising.
Paying for marketing and outreach is typically necessary for a company to grow, but it can also feel risky for small business owners because there is no guaranteed return on investment. While certain established marketing outlets can offer somewhat consistent results, newer channels like social media are constantly changing and evolving and may be less dependable. In addition, newer companies may not see immediate results and may need to build brand awareness and reputation before they see their marketing efforts converting into sales and customers.
So how much should small businesses be spending on marketing and advertising? According to the U.S. Small Business Administration, companies generating less than $5 million annually should spend between 7 and 8 percent of their gross revenue on advertising and marketing. However, industry experts have suggested anywhere from 2 to 14 percent depending on factors such as the age of the business and the competitiveness of the particular market.
When determining your advertising and marketing budget as a small business owner, some additional factors to consider are:
- The type of business. In general, B2C companies should spend a slightly higher proportion of their average budget on marketing because they will need to reach their various audience segments. Companies that provide products and services directly to consumers typically spend between 5 and 10 percent on marketing. Conversely, B2B companies often spend less, around 2 to 5 percent.
- The audience. Different audiences will respond in different ways to advertising in general as well as to specific marketing channels. It is important to vary your marketing efforts but also to concentrate spending on campaigns and platforms that will most effectively reach your target audience. For example, millennials are more likely to shop on their phones and respond to mobile and social media ads.
- The advertising medium. Social media is becoming one of the most powerful marketing channels, both in terms of paid ads and influencer marketing. One survey found that small businesses find social media to be the most effective medium for increasing sales, converting leads, and distinguishing themselves from the competition. Free social media tools can also be leveraged to maximize ad dollar spend.
Keep in mind that marketing and advertising costs may not pay off right away. It can take anywhere from 6 to 12+ months to see measurable results from advertising campaigns. The most important part of determining a marketing budget is to stay consistent and track results. No matter how much of your budget you end up allocating to advertising, be sure that you are continuing to invest over time and that you track data and adjust your strategies accordingly.
Datalou is the only supplier diversity management system with over one million suppliers with specific capabilities in advertising, marketing, communications, and media. Our robust tracking and reporting system helps you document spending and sourcing efforts, manage certifications, and share data with stakeholders.