How much should a small business spend on marketing?

How much should a small business spend on marketing?
March 5, 2020 Mackman
How much should a small business spend on marketing

Done right, marketing is all about growth. It is a profit centre, not a cost centre. For every pound spent on marketing, you should get at least two back, and preferably five or more. The more you put in, the more you should get out…

But how might a typical SME predict and calculate this equation? Because, in my experience, clients without the experience or understanding of marketing as a profit centre, and of the importance of Return On Investment, rarely invest sufficiently to make their potential return. They ‘invest’ so little, so cautiously, that it amounts to a false economy – becoming a ‘cost’, rather than an ‘investment’.

So what should my marketing budget be?

Two questions clients often ask are ‘How much should I spend on marketing?’, and ‘How can I calculate what my return will be?’ To be honest, they should not be asking their agency! Instead they should be making reasonable, stretching demands of their agency and measuring the KPIs themselves. It should be part of the agency briefing and review.

I often sense a false dichotomy when discussing budgets with prospective clients. I understand their inclination to spend as little as possible to achieve the best results; but many have had their fingers burnt in the past. So, I enquire as to how they had measured the performance in these cases – and the answers are often unstructured and sometimes simply subjective. I invariably discover that an agency has tried to achieve marketing alchemy with an inappropriately small budget and failed, with both parties disappointed.

So, what advice can I give to avoid overspending and underachieving? Here are some starters:

Customer Lifetime Value

If you’ve not done so, read up on Customer Lifetime Value. To simply calculate CLV, multiply your average transaction value by the average annual purchase frequency – and then multiply that by the average customer lifetime in years. Any savvy marketer or business owner will have this number at their fingertips and, most likely, what they are aiming for next year. It’s essential.

Ready for growth?

Recognise the correlation between your growth targets and your capacity to provide excellent products/services to those additional customers, and equally exceptional customer service. For example, even if you think you can process targeted growth, might the additional workload stretch your team too far and damage your reputation? Is it going to cripple cash-flow? Can you find the additional talent needed to deliver professional services?

Test it first

Before committing to most types of marketing, there is usually a lower cost way of testing the initiative. This may involve a single option or A/B type testing where options are compared. Carefully consider the metrics used to measure outcomes, and also the differences between, say, the demographics in a particular region as a test, compared with the entire UK should you extrapolate the findings to decide whether to roll out.

Sunk cost fallacy

More commonly known as ‘throwing good money after bad’… If, for example you have invested in a rebrand or a new website which is clearly under-performing, then you need to consider the ‘sunk costs’ (i.e. irretrievable monies spent) as losses, rather than investments. Having spent money on such a project, it is human nature to endeavour with it, when the opposite, also known as ‘cutting your losses’, should be considered. Decide to draw the line and either revert to the previous status or learn from that failure and start again.

In conclusion, in the past I have been at pains to point out that for large companies with well-resourced marketing functions, a roster of specialist agencies can optimise marketing results. However, for SMEs, the benefits of working with a single, multi-functional and responsible agency is invaluable. In addition, as with all positive and consensual relationships, both parties learn from mistakes and grow together, thereby reducing repeat errors and growing faster. As innovators put it, ‘Fail fast and learn faster’.

Paul Mackman, Company Director

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