How much should a SMB invest in marketing?

How much should a SMB invest in marketing?

Business colleagues meeting to conference professional investor working a new marketing business

Investing money in marketing is not always at the top of the list when one analyzes the priorities of small business owners.

The US Small Business Administration (SBA) recommends that SMBs should invest at least 7% to 8% of their gross revenue in marketing to grow their sales over time, yet it is often hard to apply the same standard to multiple businesses as their needs and situation can vary widely from one industry to the other.

For that reason, in the following article we will provide a few methods through which you can define the amount of money that should be allocated to the marketing budget of your SMB, while providing some recommendations as to how you can finance those expenses when it is time to execute.

Using percentages and profitability estimates as guidance

 

As outlined above, establishing a fixed percentage of your sales to determine your monthly marketing budget can be a convenient way to estimate the amount of money that the business will spend in advertising its products and services.

That said, since marketing campaigns should be planned and designed before a dime in sales is obtained, how is it that a company can determine how much it will sell beforehand?

Here is where financial estimations become handy, as you can analyze your sales trends along with certain macroeconomic factors to forecast the amount of sales that your business can generate after the market campaign is launched.

For this purpose, financial experts commonly use statistical models that seek to identify which variables tend to be accurate in forecasting a business’ monthly sales and then they use the information provided by research firms to assign a value to each of those variables.

Once that process is completed, three scenarios are typically outlined including a ‘base case’ scenario, a worst-case scenario, and an optimistic scenario.

This is perhaps the most professional and objective way to determine a marketing budget, yet it is often too complex for an SMB.

With that in mind, there is an easier alternative that involves asking the following questions:

  • How much would you typically sell?
  • How much more do you think you will sell as a result of the marketing campaign?
  • Which percentage of those sales you are planning to use for your marketing efforts?

Since you probably know your business well enough to determine how much you should sell in a particular month under normal circumstances, the following question to respond is how much should the marketing campaign bring in after it is executed.

You can either assign a percentage to this forecasted growth or you can express it as a fixed amount. Once that is done, you can determine the percentage of your future sales that will be used for marketing and voilá, you have now determined your marketing budget.

Using small business loans to pay for your marketing campaign

Now, how can you finance a marketing campaign that has not brought a single dollar?

Well, depending on the complexity of the campaign you can either choose to fund it with the proceeds of your past sales or you can also rely on small business loans like the ones offered by Camino Financial.

These small business loans generate an interest expense, yes, but that expense can be easily paid by the extra profits that your marketing campaign will bring in the form of higher sales – assuming the campaign is successful in achieving this goal.

For example, let’s say that your product is tires. Your business earns an average gross profit of 16% in each tire it sells and your normal operating expenses – i.e. rent, utilities, payroll, etc. – takes out 5% of that 16%.

Now, if you incorporate small business loans to your company’s financial structure you’ll have to add a new expense – the cost of borrowing – and that expense might reduce your net margin by say 1%.

However, if your sales go up, your net margin might not suffer at all as you will be able to fully cover that extra cost through the fresh profits obtained from those additional sales as long as your other expenses remain unchanged.

See how that works? So, if you are planning to launch a marketing campaign for your small business soon you can establish your budget by following the guidelines set forth in this article and you can use small business loans to finance the cost of a marketing campaign and use the net proceeds of your added sales to cover for their cost.

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