Budgeting for Marketing from our ASE Jan 2019 Newsletter
What Percentage of Gross Revenue Should Be Used for Marketing & Advertising?
Setting the marketing and advertising budget is a daunting challenge for many small-business owners because of the many ways to approach the task. Percentage of gross revenue is one of the more favored methods of budgeting because it allows your spending to fluctuate as your revenue does. In the real world, however, marketing and advertising budgets vary widely based on your industry, competition, profit margins and a host of other considerations.
Marketing by Percentages
The Canadian Small Business Groups and The Business Development Bank of Canada [BDC] recommends 5-10% of gross revenue on marketing and advertising. The U.S. Small Business Administration recommends spending 7 to 8 percent a year of your gross revenue if you are doing less than $5 million a year in sales and your net profit margin -after expenses- is in the 10 to 12 percent range. Some marketing experts advise that start-up and small businesses usually allocate between 2 and 3 percent of revenue for marketing and advertising, and much higher percent if you’re in a competitive industry. Unfortunately startup businesses have to get their name out there so higher than 2-3 percent should be allocated in the initial investment budget of your new business
The Reality: Spending Variables
There is a limit to how much you can afford to spend regardless of what others are spending. Let affordability guide your spending. Recognize that certain internal and external factors may cause your spending to fluctuate. As mentioned, starting a business or introducing a new product requires more spending than spending on an on-going business. Conversely, you may want to reduce marketing spending while you activate your exit strategy if your business is in its twilight years. If you’re selling high-ticket, high-margin goods or services, you can afford to spend more on marketing. Likewise, if the competition is strong, you may have no choice but to increase your marketing spending.
Marketing Drives Revenue
Marketing typically drives revenue rather than the reverse in most successful businesses. Moreover, marketing and advertising spending in most successful businesses is task or project-oriented. Task-oriented marketing requires a marketing plan, something most marketing experts strongly recommend. The percentage-of-gross-revenue calculation is a useful ballpark gauge of spending parameters. However you need to be flexible depending on the requirements of your marketing plan. For worthwhile information, you should obtain specific marketing as a percentage of gross revenue figures for your industry. This can be done from your industry trade association.
FYI: New Fall 2018 funding programs exclusively for businesses are available now. If you own a business in Canada, or are actively starting a business you could be eligible for $5,000-750,000 in Government Grants, Government Secured Loans, or Subsidies to support some of your business costs. Already have funding? There are still government programs available to you!
Based on article by George Boykin, small business.chron, modified for the Canadian market by ASE