How to create an effective advertising budget 

Key takeaways

• A good advertising budget should comprise 7-10% of your total sales revenue
• Ad spending can accelerate lead generation and help you gain new customers faster
• Consider your advertising goals, target audience, and potential return on investment to narrow down the ad platforms with the highest yield

Advertising is essential for boosting your small business growth. However, finding the sweet spot for your ad spending isn’t always easy. Underspending can mean missed opportunities, while overspending can put your business in the red—and not knowing how much you’re spending can put you at risk for both.

To maintain your financial health while meeting business goals, consider creating a strategic advertising budget. Here’s what you need to know to manage your ad spending wisely.

How much should you spend on advertising?

Your advertising budget should be around 7-10% of your total sales revenue, and it will make up a sizable portion of your larger annual marketing budget, which can range from 5-20%+, depending on the state of your business, revenue, and goals. For startups with varying or low revenue, using a percentage might not be as reliable. In this case, starting with a minimum of $1,000 should be an adequate advertising budget.

For this example, let’s say your annual revenue is $50,000. Your advertising budget should be between $3,500-$5,000 per year. Think of this range as a rule of thumb, then tailor your specific ad spend to drive funds while leaving wiggle room for unexpected costs. 

Spending more of your marketing budget on ads is ideal for accelerating lead generation and sales, not to mention boosting brand awareness. The rest of your marketing dollars can be spent on production like contract labor, content marketing development, and printing costs. Pro tip: If you want to focus on building relationships with customers, consider spending more on production—and therefore, organic (unpaid) marketing.

Keep in mind that these percentages aren’t set in stone. Your spending can vary based on your industry, business model, and other factors. Companies that sell to other businesses often spend less to execute their advertising strategy than those that sell products or services to consumers. However, your budget shouldn’t deviate too much from the 7-10% average. 

How to allocate your advertising budget

Ad budget allocation, which is the process of setting a spending limit for each advertising channel, is just as important as knowing your maximum ad expenditures for the year. It helps to prioritize your spending to get the best return on investment (ROI) possible. Follow these three steps to allocate your budget wisely.

1. Define your advertising goals

The results of your ad spending should directly contribute to your business and marketing goals. Before allocating your budget, outline the specific outcomes you want from your advertising spending. Identify measurable advertising objectives by using key metrics you can reach within a certain time frame.

For example, one goal could be to improve lead conversion rate (the percentage of leads who become customers) by 110% by the end of your second quarter.

When you have well-defined goals, you can make better decisions about what advertising channels to invest in most.

2. Understand the cost of advertising channels

Advertising budgets for small businesses, startups, and freelancers are far from limitless, which means it’s crucial to plan for the different costs of different advertising channels.

Digital advertising

Digital advertising channels—including Yelp, social media, and search engines—tend to be the most affordable options for small businesses. That’s because many digital ad platforms let you set your own budget and focus on a small target audience. Plus, many platforms, like Yelp Ads, use a pay-per-click (or cost-per-click) payment model, which means you only pay when someone clicks on your ad.

However, different online advertising channels have different results. Most marketers say email marketing offers the best ROI with $36 for every $1 spent, closely followed by search engine optimization (SEO) with an ROI of $22 for every $1 spent. 

Meanwhile, ad campaigns on platforms like LinkedIn and Twitter tend to have lower ROI because viewers are passively browsing rather than looking to buy. Podcast, influencer, and TikTok ads are more specific online marketing options that work well for many businesses today.

Traditional advertising

Traditional ads in print media, on TV, and via sponsorships tend to cost more because they reach a mass audience (instead of a smaller, targeted one). A billboard can cost anywhere from $600 to $20,000 per month, depending on location and the number of eyes it reaches. While large corporations can justify exorbitant marketing campaigns with a lower ROI, small businesses should only focus on traditional ads if their audience isn’t digitally savvy.

Direct mail is the main exception in the traditional advertising realm—it offers high returns because it goes straight into consumers’ hands, allowing you to target more specific audiences (for instance, people who live near your store or new residents in the area).

After doing some market research of your own, start narrowing down your advertising channels based on what you can afford and what will help achieve your goals.

3. Prioritize with your target audience in mind

Marketing channels that have a high ROI for some businesses won’t necessarily have the same ROI for other businesses. For instance, TikTok is a thriving ad platform for Generation Z and young millennials. If you want to reach older consumers, investing in TikTok ads will only reach a fraction of your target market.

Rank your advertising channels based on the likelihood that your ideal customers actually use them. Then, weigh your new list against your potential ROI from each channel to rank those advertising channels in order of priority.

The lower your advertising budget, the fewer channels you should focus on. For instance, if your monthly sales revenue is $2,500, you should set aside a maximum of $250 per month for your advertising budget. Choosing six channels would spread your budget too thin, making it difficult to get significant results, even from digital marketing channels.

Once you’ve narrowed down the top channels to focus on, decide on your budget allocation, which doesn’t have to be split evenly. For example, if you plan to invest in social media ads and search engine ads and want to take advantage of the higher ROI that comes from search, you can allocate 60% of your advertising budget to search engines and 40% to social media platforms.

Here’s an advertising budget example for a company with $100,000 annual sales revenue (meaning a maximum of $10,000 for ad spend):

• Social media ads. 25% or $2,500 per year (split between Facebook, LinkedIn, and Pinterest)
• Yelp Ads. 20% or $2,000 per year
• Search ads. 20% or $2,000 per year
• Radio and TV ads. 15% or $1,500 per year
• Video ads. 15% or $1,500 per year (split between YouTube and Facebook)
• Trade shows. 5% or $500 per year

Spend your advertising dollars wisely

To grow your company while maintaining its financial health, first figure out your advertising budget, which should make up no more than 10% of your annual sales revenue. Then, prioritize advertising options based on your target market, business needs, and goals. Allocate your ad budget by figuring out your maximum expenditures for each ad platform.

As your business grows, your ad budget can grow with it so your company stays competitive with businesses at your level. After you have a solid advertising plan in place, learn how to maximize your budget with free online advertising ideas for small businesses to reach more of your target audience.