4 steps to create a marketing budget for small business

Key takeaways

• You need a marketing budget for small business to plan your promotional activities and track your return on investment
• An effective marketing budget should have a clear strategy that highlights your business goals, target audience, and preferred marketing channels
• Many businesses use a revenue-based budgeting strategy that allocates a certain percentage of total revenue to marketing efforts

Small businesses flourish through tactical, smart marketing methods, and without advertising, it’s unlikely your business will grow. An effective marketing budget for small business is a blueprint that guides how you spend the money you’ve allocated to promoting your product or service. It aligns your marketing efforts with your business goals and serves as a critical tool for tracking return on investment. 

Marketing expenses include things like paid digital advertising, market research, sponsored social media posts, and marketing staff, all of which will be neatly organized in your marketing budget.

It can seem challenging to plan your marketing budget, especially if you’re starting to increase your marketing spend. However, it’s easy to move forward when you break it down into four easy steps. Learn how to develop a marketing strategy, customize your marketing costs, and track the success of your marketing channels.

1. Develop a marketing strategy

Before you can calculate a precise marketing budget for your small business, you’ll need to formulate a well-thought-out marketing strategy. You must identify and understand your marketing objectives, the needs of your consumers, current market conditions, and how you’ll market to your target audience.

Set marketing goals

It all starts with setting goals for your marketing initiatives. This gives you attainable milestones and helps gauge the success of your marketing efforts later down the road.

It’s easy to say “I want to increase sales for my business.” However, marketing goals should be much more specific. Set short-term and long-term marketing goals you think define a successful marketing campaign. Short-term goals may take weeks or months to attain, while long-term goals may need up to 12 months or more to reach. Here are a few examples:

Short-term marketing goals

• Increase monthly website visitors by 10%
• Gain 50 new customers from email marketing promotions

Long-term marketing goals

• Secure first-page positioning on search engines for the two most important keyword phrases related to your product or services
• Increase in-store sales by 20% in the next two years

Understand your target audience

Until you know your customer base, you won’t be able to launch successful marketing campaigns. Conducting market research is a good starting point to gather information about your customers before spending money on marketing initiatives.

Market research doesn’t need to cost a fortune or take up a lot of time. There are ways you can research your target audience and gain insight without spending a dime.

Here are a few free market research tactics:

• Ask in-store customers to take surveys with questions that help explain their purchasing habits
• Interview your existing customers after they’ve bought your product or service to discover their needs and pain points
• Use Google Analytics to research your target audience’s demographics and online behavior
• Take a look at your Yelp reviews to uncover real opinions from previous customers; claim your Yelp Business page to respond to reviews and engage with those customers

It’s also beneficial to develop buyer personas so you can visualize what your ideal customer looks like. Buyer personas are characterizations of different groups of your target consumers.

Gather as much of this information as you can when conducting market research and developing your customer personas:

• Age
• Income
• Gender
• Geographical area
• Marital status
• Education
• Job title
• Motivations
• Information sources

Conduct competitive analysis

You can learn a lot from your competitors. Not only can you see what marketing channels they’re using, but you can also see what they’re doing well and capitalize on areas where they’re falling short.

Here’s how to conduct a competitive analysis for free:

• Visit competitors’ stores to see how they promote their business
• Check out competitor websites to see how they portray their business online; this may also lead to receiving online advertisements after you leave their website, which you can also track to see how they’re using online marketing
• Sign up for email communications from competitors to see what kind of offers and promotions they send to potential customers
• Research competitors on search engines to see how they position themselves and where they rank on search engine results pages
• Dig through competitors’ Yelp reviews to see what clients like (and dislike) about their business

Choose your marketing channels

After setting marketing goals and conducting market research, you can make an educated choice as to which marketing channels you want to use. The channels you use will have the biggest impact on your marketing costs.

There’s a seemingly endless selection of marketing channels that can help grow your business throughout the various stages of the sales funnel.

Marketing channels like television and radio advertising help build brand awareness and interest. On the other hand, outlets like email marketing and digital advertising may push prospects to consider your business and become paying customers.

There are two main categories of marketing initiatives—offline marketing and digital marketing. Offline marketing uses more traditional methods, and digital marketing channels allow for increased automation, advanced audience targeting, and more measurable performance.

Offline marketing channels

• ​Trade shows and events
• Radio advertisements
• Business cards
• Flyers
• Press releases
• TV advertisements
• Direct mail

Digital marketing channels

• Social media marketing
• Email marketing
• Search engine optimization (SEO)
• Content marketing
• Pay-per-click advertising (PPC)
• Business website

To determine which channels are best for your business, review your market research. It will give you insights as to how receptive your target audience might be to any given marketing channel.

The cost of different types of marketing channels varies widely, and you should expect to pay both fixed and variable costs when building your marketing budget. For instance, website hosting and an email marketing subscription will have a fixed monthly or yearly cost, but pay-per-click advertising or printing flyers will incur a variable cost which will fluctuate depending on your level of output.

2. Calculate your marketing budget for small business

A big question for small business owners is how much money they should allocate to their marketing budget. For many owners, it’s not an easy question to answer, especially when you’re growing your business and are hesitant to increase your spending. There are multiple approaches to setting a marketing budget, but the simplest way to build a budget is to use a revenue-based model.

Revenue-based budgeting

Revenue-based budgeting is one of the most common strategies you can use to determine your company’s marketing investment. It consists of setting your marketing budget as a percentage of your gross revenue.

As a general rule, experts recommend allocating 7% to 8% of their annual gross revenue on marketing. However, the amount you allocate to your marketing budget depends largely on the current state of your business and your goals.

Some businesses have a firm grasp on the local market share and simply need to maintain their position in the market. Small businesses in this scenario can typically allocate 5% or less of their gross revenue.

Startups or small businesses seeking to grow and gain market share should dedicate more money to marketing—as much as 10% of gross revenue or more.

Goal-driven budgeting

Instead of using the revenue-based approach, you could use a goal-driven budgeting strategy. This involves setting tangible goals and then estimating how much money you think it will take to achieve these goals.

For example, let’s say you run a local small business and you’re launching a new service that you’ll be advertising through social media ads. Your goal is to gain at least 20 new customers from this campaign. If it costs you $10 in social media ads to earn one new customer, then you can expect to pay $200 for 20 new customers.

Competitor-based budgeting

Another way to calculate your marketing budget is to estimate how much your competitors are spending and try to match their marketing output. This keeps things on an even keel and ensures you’re allocating a similar amount of resources to your marketing efforts.

It’s tricky to estimate how much your competitors are spending, so don’t worry too much if you don’t have exact figures. You can come up with a rough estimate of marketing spend while conducting your competitive analysis.

3. Track your marketing budget

Carefully tracking the successes (and shortcomings) of your marketing efforts will help you measure your return on investment (ROI). This helps you know which methods are paying off. 

Start by tracking how much you’re spending on each channel and the number of sales each channel has generated. In some cases, you won’t only be thinking about sales but also moving prospects down the sales funnel.

For example, you can use digital analytics tools like Google Analytics to determine if digital marketing channels have attracted visitors to your website to find more information.

Consider using free marketing budget templates to track marketing spend and performance with Microsoft Excel or other spreadsheet tools.

4. Test and revise your marketing budget

Your marketing budget is a living and evolving document. There are variables that will continually alter your marketing budget—things like market conditions, revenue levels, or channel performance.

You should regularly test your marketing channels to optimize how much you’re spending. If one marketing channel is more effective than another, you can reallocate marketing spend to get the biggest bang for your buck.

Don’t forget the cost of each channel may vary over time. If one channel (say, social media ads versus PPC ads) is becoming increasingly expensive, then you may want to change course and move your marketing dollars to a different channel.

Help your business grow with a solid marketing budget

You can’t have a solid marketing plan without an organized marketing budget. It guides your marketing activities and prevents unexpected expenses from arising. A marketing budget tracks the success of your marketing campaigns, so you can optimize and get the most from your hard-earned dollars.

A marketing budget helps you track paid marketing channels, but there are plenty of ways to market your business without cutting into your budget. Take a look at these free ways to advertise your business online for more ideas.