How to develop a marketing budget

Businesses typically develop marketing budgets quarterly or annually. They should be comprehensive and include all the projects your team plans to develop in the short and long term. 

Follow these four steps when setting your marketing budget. 

1. Identify your marketing goals.

Marketing aims to build a sales funnel or generate direct sales to boost gross revenue. To create an effective marketing budget, you must determine short-term and long-term marketing goals and set key performance indicators (KPIs) as part of your marketing strategy’s big picture. 

These are examples of short-term goals: 

• Decrease website bounce rate by 5%.
• Gain 10 quality comments on social media posts per week.
• Boost brand awareness by generating 100 new social media channel followers each month.

These are examples of long-term goals: 

• Get on the first page of Google for three of your main focus keywords.
• Create a sales funnel that consistently generates 20% new customers over the next three years.
• Develop a marketing automation flow with email marketing that saves your team five hours weekly.

2. Understand your target audience (buyer personas).

A buyer persona is a fictional representation of your target customer. You can have more than one buyer persona, but try for no more than five; after all, not everyone can be your target audience. 

When developing your buyer personas, get specific, and let data guide you. Here are some ways to gather data that will help you develop your buyer personas:

• Survey your current customers.
• Interview people you think may be in your target audience.
• Use Google Analytics to determine audience demographics.
• Use Facebook Insights to track user interaction with your brand.

In each buyer persona, include the following information:

• Location
• Age
• Marital status
• Job title
• Approximate income
• Education
• Motivations and goals
• Sources they visit for information
• What makes their life easier?
• What keeps them up at night?
• As a bonus, come up with a fictional name and photo

3. Understand your market and competition.

Market research, particularly buyer demographics, can help you better understand your target market. 

To understand your market, gauge the following information. 

• General demographic info. Where do your customers live? What is their education level and average income?
• Outside influencing factors. What exterior forces could impact them and affect sales? For example, economic trends may shape how you plan your budget, and tech trends may prompt buyers to use different methods to shop or make payments. 
• Customers’ wants and needs. Another way to understand your market is to gauge their wants and needs. What are the top needs your company can fulfill in the market? Consider customers’ needs in the broader sense. For instance, your target market’s needs may include feeling safer in their neighborhoods or saving money.

Market budgeting also involves researching the competition. Consider the following questions: 

• Who is performing well? 
• What types of ads and marketing strategies are they currently using? 
• How much are they budgeting for their marketing department? 

Industry type can impact marketing spend. According to the February 2022 CMO Survey, B2B product companies typically spend an average of 9.4% of their revenue on marketing; the corresponding figure for B2B service companies is 10%. B2C product companies spend an average of 14.2% of their revenue on marketing; the corresponding B2C services figure is 8.7%.

4. Choose your marketing channels.

To generate the best return on the revenue you spend, market where your buyer personas go. The marketing channels you should consider break down into four primary categories: 

• Digital marketing. Digital marketing channels include social media marketing, online content marketing, automated or manual email marketing, online advertising with pay-per-click ads or social media ads (paid media), and search engine optimization.
• Inbound marketing. Some inbound marketing channels overlap with digital marketing, including SEO, business blogs, videos on YouTube and Vimeo, e-books, and other elements of your content strategy.
• Outbound marketing. Outbound marketing can be challenging to track, so combining it with inbound marketing is helpful. The most traceable form of outbound marketing is email marketing. Other types of outbound marketing include TV and radio advertisements, direct mail marketing, press releases, trade shows, and promo products.
• Brand awareness campaigns. These channels can also overlap with other channels and may include social media marketing and advertising, content marketing, public relations, and video marketing and advertising.

How much should you calculate for a marketing budget?

Companies use different strategies to develop marketing budgets, including the following:

• Revenue-based. One way to determine your marketing budget is to review your annual revenue sheets and set aside a percentage. Some businesses might allocate between 6.5% and 8.5% for marketing purposes. The percentage may be higher for newer business ventures. Businesses under five years old should consider spending 10% to 12% on marketing.
• Competition-matched. Based on previous research, you could also budget based on the amount your competition is spending.
• Top-down. A top-down budget plan means there isn’t a set calculation on how much you should spend for the quarter or year. Instead, management determines a figure and asks the marketing department to stay within those parameters.
• Goal-driven. With goal-driven marketing, management and marketing determine goals first and then set a budget to achieve them. For instance, one goal may be to gain X amount of followers on social media. Another goal may be to achieve X amount of conversions online through your business website. Assign a monetary value to each goal. For example, you could assign social media follows as being worth 50 cents per user, so gaining 100 new followers would represent $50.

Common marketing budget mistakes

Because there are so many moving parts involved in setting up your marketing budget, there are more opportunities to make mistakes. Any misstep in the process can lead to less effective marketing overall and potential financial challenges for your business. 

Below are a few typical budget-planning mistakes. Watch out for them as you create your budget. 

• Putting less money toward effective methods. Companies often drive funding to their longtime favorite processes, even when a newer marketing channel proves effective. The notion that a successful marketing method will always be effective is logical but misguided. The consumer market shifts frequently; what worked one day may not work the next. Instead, consistently invest in new and old successful tactics. This way, you can keep pace with changing market conditions through higher-quality automation, personalization and other upgrades.
• Not correcting bad data. Taking a shot in the dark on a marketing method that works with your target audience can present a financial risk. You need to assess your consumer base’s data to create corresponding marketing campaigns, but bad data can lead to less effective marketing overall. Go through your analytics and remove any inconsistencies or outliers before they impact your budget.
• Discounting current customers. When you’re creating a marketing campaign, you might feel pressure to cast an increasingly wider net to move more consumers through the sales funnel. But adding new customers often costs more than it does to keep your current ones. Only so many people will reach the end of your sales funnel, and they often have many reasons why they did. Focus on retaining these people for a larger and more consistent profit boost.
• Using the previous year’s marketing budget. The market changes year to year as consumer priorities shift, so a marketing budget that worked one year will likely be less effective the next. The budget-creation process should always include a reexamination of company goals and a new analysis of the current market. Finding out how new technologies, political climates, social movements, and other factors have affected consumers can even provide new marketing opportunities. 

How much do small businesses spend on advertising and marketing?

According to the U.S. Small Business Administration, a typical marketing spending recommendation for profitable businesses making less than $5 million in sales annually is about 8% of the gross revenue.

However, the exact amount small businesses spend on advertising and marketing varies widely. To give you a better idea of what to spend, the following business owners shared their budget amounts and where those budgets go.

Dennis Vu, CEO and co-founder of Ringblaze

“We spend $3,000 per month on marketing. We’re a startup in the SaaS industry, business phone app niche. We sell a business phone app that lets our customers easily open up new channels for their customers to call them,” said David Vu, CEO and co-founder of Ringblaze.

“When it comes to the money we invest in marketing, most of it goes on SEO and content marketing,” he added. “We realize that it’s a long game, but so far, it’s made a lot of sense in the amount of exposure and the number of leads we generated.”

In two months, Vu’s company doubled its organic traffic, tripled its website’s domain authority, generated 10 to 20 backlinks to its website, and increased the number of leads it generates by around 30%.

“We may have just gotten lucky, but the results we got from digital marketing are excellent,” Vu said. “Our doubts initially were that the agency we hired would not deliver at all, especially for a small budget like this one. Most companies that I know spend five times this amount monthly on marketing at the least, so we are pretty happy with the results we got.”

Dave Madrid, solopreneur developer

“I had hoped to bootstrap marketing, and my preference is still to do that where possible, as this fits with the ethos of my business,” said Dave Madrid, a self-employed developer. “This means that my external marketing spend is currently very small, but growing month-on-month. External spend has gone on location-targeted Facebook ads, Google ads, off-page SEO activities and link-building.”

Madrid added that he is increasing his internal investment in blogging, developing a social media following, engaging in local and startup Facebook groups, conducting polls, and asking questions to generate engagement.

“Up to now, I have found Facebook ads to be an effective approach to generate views (more so than Google ads), although engagement has been achieved best through Facebook groups, posting about our blog, [and] engaging with others’ questions.”

The budget for Madrid’s external marketing activities has increased from what he says was an unrealistic $1,000 per year to $5,000 per year. He continues to evaluate whether or not his budget needs to increase. 

Madrid concluded that 15% or more is a reasonable amount of gross revenue for new businesses to put toward advertising and marketing. Established businesses can reduce that substantially; even as little as 5% of gross revenue could work. You can always start small and work your way up.

Kristin Marquet, creative director and owner of Marquet Media

Kristin Marquet said her company spends about $30,000 a year on marketing campaigns, tools and outsourcing, which equates to about $7,500 a quarter.

Behind that marketing budget are two brands: Marquet Media – a branding and design consultancy that offers branding, web design and PR services – and Fem Founder, a media company that publishes content on entrepreneurship and marketing for female entrepreneurs. 

Marquet also sells digital products on the website out of New York City, where she is based. Pinterest is one of her primary marketing channels. It helps her build email lists for her digital products and courses.

Marquet is clear on her profit margins, as all marketers should be. “For every dollar invested in promoted pins [on Pinterest], I generate about $1.30 in revenue. I also invest in email marketing software, which is about $600 a month. I use Leadpages for landing page software to capture leads, which is about $30 a month, and social media automation, which is about $79 a month.”

Like many entrepreneurs and small business owners, Marquet was unsure of marketing ROI when she started her businesses, so she was a little nervous about allocating any budget. She started off with a $500 budget and tested Google and Facebook ads, but she learned those platforms are not where her target customers spend the most time; they are very active on Pinterest instead.

Based on her experience, Marquet thinks any business should allocate at least 10% of its gross revenue for marketing and advertising, but 12% is best if it can invest this much. 

How to track your marketing budget

Campaign tracking and lead tracking are integral to gauging your marketing efforts’ success. 

• Campaign tracking. Create one line item per campaign that notes the campaign name and invested amount. Include the salaries of involved employees and the total time it took to complete each campaign. Note where campaign and time adjustments are necessary.
• Lead tracking. Create one line item per lead with the date, lead source, campaign, assigned sales rep, notes, status and revenue generated.

When adjusting your marketing budget and tweaking a strategy, go slowly, adjusting one key variable at a time. Something as simple as changing a photo on a Facebook ad and increasing its budget by just a few dollars a day could make a huge difference.

Marketing budget templates

For extra assistance, a marketing budget template can be useful. Here are some resources that offer marketing budget templates:

• Smartsheet
• Vital
• Microsoft Office
• SCORE
• TrackMaven

Get the most out of your marketing budget

Effective marketing is vital to your company’s success. It’s how you attract new customers and keep current ones returning for more. Of course, there are usually only so many resources you can pour into your marketing efforts. Creating a budget can push your spending toward the most successful channels – and keep enough money available for all your other needs.

Isaiah Atkins contributed to the reporting and writing in this article. Some source interviews were conducted for a previous version of this article.