Let's begin by re-reading the title of this article - How much should your small business invest in marketing? Did you catch it! Invest, not spend. I could have called this article “How much should your small business spend on marketing?”, but that would have been misleading.
I like to think of marketing and sales as one. While many companies differentiate between marketing and sales, the reality is they go hand in hand. Salespeople need to understand their products and/or services and the markets in which they’re being sold, while marketing people need to understand what is being sold so they can effectively create awareness within the market. I like to sum it all up under the term marketing, as the word sales puts some people on edge, while “marketing” should conjure the thought of people - your potential customers. As such, if marketing creates awareness and leads to sales, and sales is the lifeblood of business, then marketing should be your number one priority.
10% of revenue! There I said it. No beating around the bush. Some will agree and some won’t. Some will say that there are many variables that need to be taken into consideration such as the industry you’re in, competition, and so on. They are absolutely right, there are many factors to consider. However, if you want a quick, simple answer and you’re serious about taking your business to the next level, then start thinking about budgeting 10% of your total revenue.
A quick search on Google and you’ll find general “rules of thumb” that state you should spend between 2.5% and 10% of revenue. In some industries it could be far more. Some have even gone as far as stating that spending 5% will help you maintain your market share, while spending 10% will enable you to grow your market share.
Let's clarify things - we’re talking about marketing a small business, not medium or large businesses. Small business, by Canada’s definition, is having fewer than 100 paid employees. The reality is the majority of small businesses in Canada are actually categorized as micro businesses - businesses with 1 to 4 paid employees. In fact micro businesses account for 54% of all employer business establishments in Canada. Why does this matter? Because I want you to think about your small business within the context of our economy, so that you understand how spending 10% of your revenue can impact your bottom line.
Hopefully you have a business plan with financial targets. How are you going to hit those targets? Marketing!
Let's say you do $250,000 in annual revenue and you want to double it. There is no reason you can’t reach $500,000 in annual revenue provided you understand your market (including knowing whether your market is large enough to support such growth), and make the necessary investments to effectively reach the market.
Let's break the numbers down. If you have $250,000 in annual revenue and you are going to invest 10% in marketing, that means your marketing budget is $25,000 per year or approximately $2,100 per month (rounding up slightly). That’s a lot of money, which is why you’re not going to spend it, you’re going to invest it. This leads us to the next point - measuring your ROI (return on investment).
I would never advise a small business to invest any amount of money in marketing without being able to measure the ROI. For every dollar you invest, you need to make a dollar back just to break-even. But the name of the game isn’t break-even - it’s growth. You need to grow revenue, profits and the business as a whole.
In today’s digital economy there are numerous technologies and platforms to help you track and measure results. One of the more popular tools, which happens to be free, is Google Analytics. If you don’t have anything in place to track and measure your marketing initiatives, Google Analytics is a great place to start. I would encourage you to look into it after reading this article.
One of the biggest mistakes I see small businesses make is not knowing their numbers. You have to know your margins and customer-lifetime-value (CLV). If you don’t, you’re just spending money, not investing it.
How much profit do you make on each sale? You need to know this so that you know how much you can spend to acquire a new customer while remaining profitable. Determining your profit margin on the sale of one-time products or services requires a little bit of work but should be fairly straight forward. Determining the profit or CLV of a recurring product or service is a little harder to do, as you have to know how often and for which duration those recurring sales will take place.
Let's say you own and operate a dental practice. You shouldn’t determine the profit of a patient based on their first visit, as people typically return to their dentist a couple times a year, year after year. Therefore you need to estimate the lifetime value of your clients/patients.
Estimating the lifetime value of a client/patient can be tricky and will require some guessing / forecasting. If you’ve been in business a for number of years, you can review patient and transaction data from the past few years, to get a fairly accurate view of how much revenue and profit you make from each patient. If you’re a new business, you’ll have to make a guestimate and adjust as you collect data over time.
Assume you charge $200 for a patient’s first visit and the profit is $100. That would mean you can spend up to $100 to acquire a new patient. Obviously you’d want to spend less so that you have something to show for your efforts, but nonetheless you have up to $100 to invest in acquiring a new patient. However, this is the wrong way to approach it. You need to know how many times each year that patient will return, what they spend on average each visit, and how many years on average a person will remain a patient.
Assume patients of your dental practice come in two times per year at an average cost of $200 per visit and you have a 50% profit margin. That means each patient is worth $400 per year in revenue, or $200 per year in profit. Now let's assume that each person remains a client for an average of 5 years. Your CLV or Customer Lifetime Value is $2,000 per patient ($400 per year x 5 years). That equates to $1,000 profit over the lifetime of each patient. In theory, you could spend up to $1,000 to acquire a new patient.
It’s important to know your CLV as it will help you determine where and how you should invest your marketing dollars based on your budget. We will address this in a future, in depth article on this topic.
I know spending 10% of your revenue can seem like a gamble. It’s a lot of money and there are no guarantees. I also know that not everyone who reads this article will heed the advice, and that those who do, stand to benefit from those who don’t.