Your Marketing Budget: The Number Everyone Underestimates

Part C: Prepare the Business to Launch

If there is one thing we always see when a new business plan lands on our desk, it is this: the marketing budget is too small. Not slightly small. Usually an afterthought, written down last, made of whatever was left over after the truck, the lease and the equipment. And then the owner spends the first year wondering why the phone is quiet.

So let me start with a question rather than a number. How much are you willing to invest in making more money? Because that is what a marketing budget is: the part of your plan that determines whether anyone finds out about the rest of it.

Return, not spend

There is a direct link between what you spend on marketing and what you get back. What you get back is called return on investment, and the reason it is shown as a percentage rather than in dollars is that a percentage lets you compare. Two campaigns that cost the same and bring back different results are easy to judge. A campaign that costs more but returns more per dollar is often the better one, and only the percentage shows you that.

The basic formula is simple: money made on a campaign against money spent on it. What that does for you is let you decide where the next dollar goes. Once you treat return as a percentage, you stop asking “can I afford marketing?” and start asking “which marketing is earning its keep?” Those are different businesses.

What other companies spend

How much do other companies spend on marketing? In our experience the spread is huge, from almost nothing to a very large share of revenue, and neither end is automatically right. The companies at the bottom are printing business cards, possibly putting up a simple website and photocopying a flyer. The companies at the top are running large campaigns through multiple channels, usually with specialized firms planning and running everything.

There is no single number I can give you as the realistic middle. What a business spends depends on its industry and its margins. A company with fat margins can carry a much bigger marketing line than one running on thin margins, and a startup often needs heavier marketing simply to have a chance.

Then there are two kinds of small business owner. The first is the sole proprietor moving from working for someone else to working for themselves: the plumber, the electrician, the consultant. They spend very little on marketing and live on word of mouth and referrals. A lot of them stay small on word of mouth alone. It works, but it caps you. The second kind intends to grow. Their goal is a business that eventually does not need them present to produce an income. These owners plan for a larger budget, often a much bigger share of what each job leaves behind in the first few years than they will need later, as far as their margins can carry it, and they put it toward becoming a recognized name with an image that lets them grow.

Neither is wrong. But choose it. Do not drift into the first group by accident because the budget line was the last one you filled in.

The questions that set your number

Rather than copy a percentage, work backward from what a customer is worth to you. What does a new customer bring in over the years you keep them, and how many new customers do you want? That tells you what you can afford to pay to get one, counted in gross profit (what a job leaves after its direct costs) rather than revenue, and it will look different for a roofer with big-ticket jobs than for a restaurant with a thin margin. Then answer these. Where do I want to take this business? How can I invest in a smart way rather than just spending? Do I know what my return is on the money I am spending now? What can I afford, and is that actually enough? If I need more, how can I put money into marketing by using what I already have, such as alliances and shared campaigns? Am I using traditional methods or untraditional ones, and which gives me the higher return? Should I spend part of the money on help planning rather than all of it on doing? Do I fully understand what makes my clients choose me? And what could I do to encourage repeat business, which is the cheapest marketing there is?

One more thing. There is always a connection between what your materials look like, what you spend and what you get back. Sometimes the channel is right and the material is weak. Sometimes the material is strong and the channel is wrong. The key to effective marketing is the right advertisement in the right place, and the budget only works when both are true.

Set the number this week

Go back to the plan you wrote in the business plan lesson and look at the marketing line. Write next to it whether it was a decision or a leftover. Then write the marketing line as a dollar figure and work out what share of a typical job’s gross profit that figure is. Budgeting From Gross Profit, Not Revenue, later in Track 3, shows the method in full. Then decide, in writing, which of the two kinds of owner you intend to be. If the number and the intention do not match, one of them has to change this week.

Setting the budget takes two or three hours and costs nothing. If you pay a marketing consultant for a planning session, ask what it costs before you book, and pay for the planning without the doing. The expensive mistake is choosing the number by default.

Free download: the Marketing Budget Calculator, a spreadsheet that works backward from the customers you want to a budget. It is also on the Resources page.