The Best Way to Create Your Digital Marketing Budget

As you plan your small business marketing budget for the new year, your key questions might include:

• What do I need to spend on marketing?
• Which channels should I invest in?
• What does digital marketing cost?
• What percentage of my marketing budget should go toward each channel?

Everyone has heard the phrase “You have to spend money to make money.”

But the trick for small business owners is knowing how to invest that money in a way that generates a return — instead of just “spending” it.

In this short post, we want to help you find the sweet spot: the budget that gets you the maximum return on your investment.

Your small business marketing budget should effectively serve your marketing goals and ultimately grow your business.

Whatever the size of your business, whether a small “mom-and-pop shop” or a multi-location company, read on to learn how to budget for marketing to grow your business.

What Do I Need to Spend on Marketing?

The U.S. Small Business Administration (SBA) recommends businesses invest 7% to 8% of gross revenue for marketing and advertising if they are generating less than $5 million a year in sales with a net profit margin in the 10% – 12% range.

Business-to-business (B2B) firms typically invest 6-7% of revenue in marketing, while business-to-consumer (B2C) firms invest 7-9% of revenue in marketing. Businesses with less than $25 million per year in revenue spend more than 10% on marketing on average.

Source: Web Strategies

Too simple, right?

While these are great general guidelines, SBA cautions that how you spend is of greater importance than how much to spend.

There are “best practices” for almost every industry, but most marketing experts affirm that developing the marketing strategy that yields the best return for your business is the top priority.

Keep in mind that the chart above includes all kinds of marketing channels: television, outdoor signage, direct mail, website, pay-per-click advertising, email marketing and more.

Now that you have the big picture, let’s look at some more research to get a clearer picture for how to spend your digital marketing budget.

Which Marketing Channels Should I Invest In?

Since 2012, business investment in traditional channels such as television, radio and outdoor signage has dropped by single digit percentages each year.

In contrast, digital marketing spend has seen annual double-digit growth.

News flash: These days, over 80% of people look up a company online before visiting the business or making a purchasing decision.

And most of the time, they’re doing it on a smartphone.

How are you representing your business to them?

Is your voice the first they hear, or are they finding your competitors or negative reviews when they search for your brand or product?

Most businesses get started by establishing product, prices, place and distribution methods.

But people have to know a company exists before they can become its customers.

If they don’t, everything else is a waste. And the most likely place to introduce yourself is online.

The internet is increasingly where businesses initially connect with potential customers. Failing to budget for your digital presence results in sending customers to companies that do.

Under-investment in your online presence can result in “leaving money on the table” in the form of business lost to easier-to-find competitors.

Still not convinced? Let’s look at some more statistics to learn why investing in digital marketing gives your business the greatest ROI.

Why Digital Should Be at the Forefront of Your Marketing Budget

Today, the customer’s buying journey usually begins online, increasingly on a mobile device.

In fact, consumers now make a majority of purchases online rather than in-store. Amazon alone posted over $135 billion in revenue in 2016.

US online retail sales will reach more than $500 billion by 2020, up from $373 billion in 2016.

By 2021, US digital marketing spend will approach $120 billion.

The digital marketing channels of paid search, display advertising, social media advertising, online video advertising and email marketing will make up 46% of all advertising in the next 5 years. Spend on online video is already up 114% since 2014.

Your website should make your company look reputable and honest, and it needs to be easy for your customers to use.

But it is no longer enough just to have a website. You must also invest in channels that find your customers and bring them to your business.

If you want to keep pace with how customers are searching for and finding you, you should make sure digital marketing is an ever-growing piece of the pie in your marketing budget.

The Rise of Mobile

US consumers now spend 5 hours per day on mobile devices such as their smartphones. Most searches (close to 120 billion per year) are now conducted on mobile devices.

Do you have a mobile-friendly or mobile-responsive website to meet them?

If not, investing in a mobile-responsive website needs to be a top marketing priority.

Some 78% of consumers have been frustrated by purchasing on their mobile phones due to download times and the way the website displays on their small screen.

Customers only wait a few seconds for a page to load before abandoning it on their mobile device.

As customers increasingly research and buy on their phones, mobile is a greater challenge to sales and customer experience for businesses. Additionally, Google actively punishes non-mobile-friendly websites by pushing them down in search rankings — below mobile-friendly competitors.

So if your site is not mobile-friendly, it might not get seen at all.

As you’re crafting your marketing budget, consider allocating a large portion of your digital marketing budget to improving your users’ experiences on mobile devices.

What Does Digital Marketing Cost?

Answers vary as widely as the number of agencies and consultants offering digital marketing services – which can have one-time, project-based pricing, subscription-based retainers or hourly rates. Business goals are another major variable, making it difficult to provide a simple answer.

However, Moz conducted a survey of over 600 agencies that resulted in the following summary:

• Hourly rates range from $76–$200/hr
• Project-specific pricing ranges from $1,000–$7,500
• The two most common monthly retainer cost ranges are $250-$500/month and $2,500-$5,000/month

It may seem obvious from looking at the numbers in these digital marketing budget examples, but it’s worth noting that most marketing firms serve relatively small businesses. This is because small businesses with fewer than 500 employees account for 99% of all businesses in the United States.

Even big firms that manage campaigns for major national brands often offer services to small and medium-sized businesses.

What Percentage of My Digital Marketing Budget Should Go Toward Each Channel?

Current trends indicate the average digital marketing budget is about 3% of annual revenue.

With the SBA and CMO survey both stating average, total marketing budgets ranging between 7% and 12% of annual revenue, we’ll split the difference (to keep the math simple) and go with 10%.

Multiple sources, including Forrester Research, have also indicated digital marketing currently averages about 30% of total marketing spend.

Most businesses are continuing to shift budgets toward digital marketing channels, which will account for 46% of all advertising by 2021.

So, in very broad strokes, trends indicate your digital marketing budget would be in the neighborhood of 3% of total annual revenue (30% of 10% = 3%).

You can now simply multiply your expected annual revenue by 3% to get an idea of what you might reasonably invest in digital marketing per year. Divide that number by 12 to determine a ballpark monthly budget, and you are ready to start shopping for solutions.

Which Digital Marketing Channels Should My Small Business Use?

If you’re wondering how to distribute that 3% amongst the various digital marketing channels, you can refer to the graphic below as a starting point. It serves as a great point of reference for digital marketing budget allocation. Marketers around the world have prioritized each channel based on expected return on investment:

In 2017, social media marketing (including channels like Facebook and LinkedIn) was a primary spending focus for the year, followed closely by content marketing and video advertising. Based on recent research and usage trends, we expect these trends to continue.

As you form your marketing budget split by channel, keep in mind what makes the most sense for your business, not necessarily what’s “trendy.”

For example, contrary to popular belief, content marketing is not the best strategy for every single industry. If you are in a “boring” industry, you will probably benefit more from a channel like paid search.

If you own a local business and receive many of your customers from search queries such as “dentist near me,” you’ll want to prioritize local and mobile search.

Want to dive more deeply into some of these specific digital channels? You can start by checking out our post on why social media marketing and advertising are still important (although the landscape is changing since organic reach for brands is basically dead) and also our post on how to set an effective PPC budget.

Three digital marketing budget examples using the 3% rule

A Local Restaurant

A full-service restaurant with annual revenue of $1 million could ballpark a digital marketing budget of $30,000 (3% x $1,000,000) per year ($2,500/month).

Note that this is right at the bottom of one of the most common ranges for agency retainers indicated by the previously cited Moz survey. Likely uses of this small business marketing budget would include local listings, mobile-responsive website, SEO, social media management, display advertising and social media advertising.

A Micro-Business

A home-based micro-business seeking to maintain revenue of $200,000 per year might plan to invest $6,000 (3% x $200,000) per year ($500/month), which would likely include managed local listings, website, occasional social media ads and monthly SEO service in its digital marketing budget allocation.

A Professional Firm

A small firm providing professional services to other businesses with $3M in annual sales might budget $90,000 (3% x $3,000,000) ($7,500/month), which would likely include website, CRO, SEO, social media management and a mix of paid advertising campaigns with Google AdWords, Facebook and LinkedIn – including ad spend.

Try this yourself. What was your business revenue in 2017? Multiply that by 3% and compare the result to your investment in digital marketing.

If you spent more, did you see a clear return on that investment?

If less, could there be opportunities to drive growth through greater investment in digital channels, or different types of digital channels?

Again, this is a rough rule of thumb with lots of exceptions.

For example, a high-margin business in a competitive market will likely budget a much greater percentage of annual revenue to marketing.

Companies marketing products and services to consumers will likely spend more on advertising and promotion than those marketing to other businesses.

A smaller startup with aggressive growth goals may have a marketing budget that exceeds revenue for the first few years of its development plan.

However, the 3% rule provides a sound place to start for most established businesses setting a digital marketing budget for the first time.

Takeaways for Your Digital Marketing Budget

• Failure to budget properly for marketing leaves potential customers to find competitors that do
• Total marketing budgets for all types of businesses tend to average between 7% to 12% of total revenue
• Digital marketing accounts for about 30% of total marketing budgets and is increasing to 46% over the next few years
• Businesses continue to shift marketing budgets away from traditional channels to digital channels
• A digital strategy in must include optimization for mobile devices
• 3% of total revenue is a good starting point for setting a small business digital marketing budget and shopping for solutions

At Qualbe Digital Marketing, we want to help small and midsized businesses grow with online solutions that match their budget.

Are you ready to explore a digital marketing plan customized for your business? Give us a call!