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How Much Should a Small Business Spend on Advertising?

Owners ask this more than anything else, and the honest answer is that it depends. Two ways of thinking about it help.

A common rule of thumb

An old U.S. Small Business Administration blog post suggested that small businesses with revenue under $5 million put about 7 to 8 percent of revenue into marketing, assuming the business keeps profit margins of about 10 to 12 percent after all its expenses. It also said the right figure depends on the industry, the size of the business and its stage of growth, and that a new business usually needs to spend more to get known. Treat it as a starting point, not a rule.

A better way: work backward from a customer

Ask what one new customer is worth to you, then decide what you can afford to pay to get one. Here is an example with made-up numbers.

• A customer spends $60 a visit and comes 4 times a year: $240 a year.
• Your cost to serve them leaves you half of that as profit: $120 a year.
• If you can win a new customer for less than $120 in advertising, you come out ahead in the first year, and every visit after that is extra.

Now you can set a budget. If you want 10 new customers a month and can pay up to $100 each, a budget of $1,000 a month makes sense. If you cannot win customers at that price, change the ads or the places before you spend more.

Start with an amount you can keep up

Pick a monthly number you can afford to lose without hurting your month, and keep it steady for at least six to eight weeks before you judge it. Stopping and starting wastes the early weeks, when people are only beginning to notice you.

Do not spread a small budget thin

With about $300 a month, two or three places is plenty. With $2,000 a month you can test more. The mistake is giving a little to everything.

Spend more when you open

A new business has to introduce itself, so the first few months usually cost more than the steady state. Plan for that, and then move down to a regular amount.