How Much Should a Small Business Budget for Marketing?

Budgeting 5-15% of revenue for marketing is the common practice for small businesses. According to the US Small Business Administration, small businesses with sales under $5 million should allocate 7-8% of their gross revenue for marketing and advertising.

Companies aiming for aggressive growth, especially in tech, may spend up to 20% of revenue for short periods. Solopreneurs running marketing on their own typically start with 2-5% of revenue. How much a small business should budget for marketing varies by industry, competition level, and growth stage.

Key Takeaways

• Small businesses allocate on average 10-15% of their revenue for marketing, with split for B2B (5-10%) and B2C (10-15%) companies.
• If you aim for aggressive growth, small business owners go for a 20% of revenue marketing budget.
• A marketing budget decision should consider customer acquisition cost (CAC) and customer lifetime value (LTV) to make sure the ROI is positive.
• A 4:1 ROI is advised (not the 3:1 ROI that was a standard some years ago).
• Mixing DIY marketing with support from freelancers in specific areas like graphics design or paid search is the most cost-effective option for small businesses.

Why you should decide on a specific monthly and yearly marketing budget?

Marketing budget is an investment in your company’s growth. It not only gives you financial clarity, helping you allocate resources well. More importantly, a marketing budget is your plan or map for reaching targets.

There’s no growth without money involved, and as a small business owner, you need to make sure that your plan to reach growth targets includes a marketing budget that will make it happen.

Without marketing budget decisions on a monthly and yearly basis, you set goals without resources to reach them. Without a marketing budget, you are also unable to see the real plan versus budget realization (budget variance). It can be chaotic walking blind.

Even if you are managing a newly founded small business, it’s a good idea to prioritize organic reach methods and word-of-mouth. Focus on good products or services that will bring you new customers. To acquire the first customers, you need some minimal marketing budgets for operational things such as website development or graphics software.

Also, setting up a marketing budget is required when you are ready to hire the first marketer, either as a freelancer or full-time employee. To make their job effective, you need to provide resources - tools and some minimal marketing budgets - so that they can deliver what they promised.

Also, freelancers or full-time employees should be treated as marketing budget categories. That’s why when you’re ready to switch from solopreneurship to hiring the first marketing role, you HAVE TO set a monthly marketing budget.

Average Marketing Spend for Small Businesses

Small businesses allocate, on average, 7-15% of their revenue for marketing.

The specific percentage depends on the business type and appetite for growth. Business-to-business (B2B) companies spend an average of 5-10% of revenue on marketing, while business-to-consumer (B2C) companies spend more - 10-15% of revenue.

The amounts in dollars depend on the market and industry, which is why specific dollar numbers are not provided.

Monthly marketing budgets for small businesses in low-cost countries will differ a lot from those in high-cost countries. Hiring costs are different, as well as even the CPC costs for the targeted phrases in search engines differ a lot! That's why you should always operate on a percentage of small business revenue, not total numbers as benchmarks.

Average Marketing Budget differs by industry

Industry-specific averages also play a role. During 2024, across various industries, average small businesses allocated 13.6% to marketing spending, with industries like financial services and insurance around 9.49% of revenue in marketing, while tech startups maintained an average of 20%.

If your business operates in a highly competitive market or aims for high growth numbers, then the average marketing budget for aggressive growth is around 20-25%.

However, businesses that maintain marketing spending over 20% for an extended period usually have poor return on investment (ROI). That's why spending 20% of the budget is advised only in the short term.

How to Allocate Marketing Budgets in a Small Business?

There are three biggest marketing budget allocation categories: people (full-time employee salaries and contractors), tools, and digital marketing activities (mostly paid media).

On average, 40-50% of the total marketing budget is invested in digital marketing activities, including crucial elements like digital advertising, search engine optimization (offsite SEO - mostly link building), search ad campaigns, and social media campaigns. All of these are driving traffic to your website.

30-50% of the marketing budget is spent on people. This means both full-time employees, like the first marketing hire in your small business, and contractors (freelancers or agencies) that you hire to own specific marketing channels (e.g., an SEO agency or WordPress developer).

Usually, on average, 10-20% of the marketing budget goes to tools. As a small business, you need marketing tools such as email marketing, marketing automation (e.g. GetResponse), or SEO content optimization software (like SurferSEO). This category also covers website development, domain ownership, or graphic software (e.g. Canva) to create social media posts.

3 key factors to determine in your marketing budget

There are 3 things important when setting up desired marketing budget. Desired CAC (cost of customer acquisition), LTV and your run way, meaning how much time you have for the investment to be returned.

Customer Acquisition Cost - CAC

Your Customer Acquisition Cost (CAC) is the total cost of your marketing and sales efforts divided by the number of customers acquired. Setting a target CAC helps you plan how much to spend on each marketing channel.

Example: If your product costs $50 and you want a 40% profit margin, your CAC should be no more than $30. This creates a clear ceiling for your marketing budget.

Lifetime Value LTV

Your Lifetime Value (LTV) calculation shows how much revenue you can expect from an average customer throughout their relationship with your business.

A healthy business typically maintains an LTV that's at least three times (ideally four times) higher than CAC. If your LTV is $150, you can afford a CAC of up to $50. Understanding this ratio helps you make informed decisions about marketing spend.

Runway aka cashflow

The runway factor refers to how quickly you need to recoup your marketing investment. If you need to see returns within 3 months, you'll focus on marketing channels like paid ads with quick conversions.

If your runway is 12 months or longer, you can allocate more budget to search optimization or brand-building activities that may not immediately convert but are foundations for predictable long term growth.

Your available cash flow directly impacts the decision. Businesses with limited cash and lower risk appetite, need shorter payback periods and must budget accordingly.

Hiring an Agency vs. In-House Team vs. DIY Marketing

Determining the best approach for managing your marketing initiatives is the key choice. It's a question if to go for:

• An external agency or freelancer(s)
• An internal team
• Undertake marketing yourself (DIY marketing)

Working with a marketing agency is the most expensive but safest option. Contracting an agency can provide expertise and valuable time, so you can concentrate on fundamental operations. It's also easy to choose an agency based on recommendations and reviews on services like Clutch or Facebook Groups. There are agencies that specialize in specific industries, work in time&material compensation or deliver specific goals.

Bringing on board a full-time in-house marketing manager brings a lot of growth opportunity but also huge financial risk.

On average, the annual salary of a marketing manager ranges from $30k in low-cost countries like Eastern Europe to over $80k in high-cost countries like US or UK. On average, the marketing manager salary is around $67,217 besides extra outlays for benefits and requisite tools for their function.

The advantage of having a marketer internally lies in maintaining direct oversight over your company's marketing budget and actions. It can be the best investment into the company growth, but if you hire poorly, it will be a huge waste of money. It's recommended only if you have marketing expertise yourself and know how to hire well.

Conversely, opting to manage your own (DIY) promotional activities might seem like an economical alternative, but often entails unforeseen expenses linked with dedicating personal time as well as potential missteps due to lack of experience.

For starting businesses, it's recommended to mix DIY marketing with outsourcing specific measurable and small areas to freelancers. Examples can be graphic design, website development, or paid search campaigns. You can easily use safe portals like Upwork or Fiverr to outsource tasks and projects.

What ROI to expect from Marketing?

Owners of small businesses should perceive the funds allocated to marketing as an investment rather than just a cost. Adopting this mindset can profoundly influence how you allocate your marketing budget.

For a small business to achieve optimal return on its marketing investment (ROI), monitoring outcomes is essential. It’s advisable for companies to target at least a 4:1 ROI from their digital marketing channels.

Conversion attribution in Google Analytics and using UTMs properly is crucial to be able to analyze the ROI and ROAS for paid ads.

Word of Mouth is the best marketing channel

Satisfied customers are your strongest marketers - 94% of happy clients will tell others about your business. This free promotion often converts better than paid advertising because people trust recommendations from friends and family.

As a small business owner, you need to to take care of your business reviews before spending the first $1 on marketing. Make your customers to leave reviews on Google and Facebook, as well as your industry-specific review platforms (like Clutch or G2Crowd for tech).

How to make customers leave reviews? Make it easy by sending follow-up emails with direct links to review sites after purchases. Some small businesses offer incentives like 10% off next purchase for verified reviews.

Online reviews impact buying decisions. Research shows that 88% of consumers trust online reviews as much as personal recommendations, and businesses with 4.5+ star ratings get nearly 3x more clicks than those with lower ratings.

Even negative reviews can help if you as the small business owner, respond personally and fix problems. This demonstrates excellent customer service, personal approach and builds trust with potential buyers. Reviews usually cost nothing in your marketing budget.

Understand Customer Lifetime Value (LTV)

LTV (Lifetime Value) shows how much revenue a customer brings during their entire relationship with your business. Calculate it using average purchase value, buying frequency, and how long customers typically stay with you.

Focus on LTV shifts your strategy from chasing one-time sales to building customer loyalty. This matters because keeping existing customers costs 5-25 times less than acquiring new ones, and increasing retention by just 5% can boost profits by 25-95%.

LTV directly impacts how much you can spend on customer acquisition.

Example: If your average customer stays for 3 years and spends $2,000 total, you can afford to spend more to acquire them than if they only spent $200.

For sustainable growth, aim for an LTV:CAC ratio of at least 4:1 – meaning you earn $4 for every $1 spent on acquisition.

Regularly Review Your Marketing Budget

Check and adjust your marketing budget monthly or quarterly to match actual costs and results. Compare planned versus actual spending (variance analysis) to spot problems early and shift resources to better-performing channels.

Track specific metrics like cost per lead and ROI by channel. Most businesses find that 20% of their marketing efforts generate 80% of results.

Tools like Etropo can help manage marketing budgets, visualize plans versus actuals, and enable team collaboration on specific line items.

Create multiple budget versions (conservative, moderate, and aggressive) to prepare for different business scenarios. This flexibility allows you to quickly adapt your marketing spend as market conditions change, maximizing results regardless of anything.

Common Marketing Budget Mistakes to Avoid

Small business owners often make common mistakes when setting up their marketing budgets:

• Allocating too much budget to a single marketing channel like PPC. Diversifying your marketing spend across multiple channels can help you reach a broader audience and reduce risk.
• Another mistake is not regularly reviewing and adjusting your marketing strategy. Failing to draw conclusions quickly and readjust strategy leads to ineffective campaigns and wasted marketing dollars.
• Spending money on digital marketing before fixing conversion measurement and analytics is another problem. Without proper tracking, it’s challenging to determine which marketing initiatives are working and which are not.

Frequently Asked Questions

What is the small business marketing budget average?

A small business should allocate approximately 5-15% of its revenues for marketing, with B2B companies allocating 5-10% and B2C companies 10-15%. Starting businesses with limited digital marketing presence, should consider even 2-5%.

This proportion helps ensure effective marketing efforts align with revenue generation.

What are the key factors to consider when determining a marketing budget?

To determine a marketing budget, it is crucial to consider customer acquisition costs, the lifecycle stage of your product, competitive analysis, and the long-term value of your customers.

These elements will ensure that your budget is both effective and aligned with your business goals.

Should I hire a marketing agency or build an in-house team?

The decision to hire a marketing agency or build an in-house team hinges on your business size, budget, and specific marketing needs.

Consider an agency for extensive expertise or an in-house team for greater control over your marketing efforts.

How to measure marketing campaigns results?

Use specific UTMs, measured in Google Analytics. Then calculate total spend on campaign (including both variable and fixed costs such as freelancers time) and number of new customers acquired. You will get CAC by dividing the total campaign spend by the number of customers.

Example: campaign costed $1000 ($200 on freelancer job and $800 on paid media), and it generated 5 new customers. Your CAC is $1000/5 = $200.

Compare CAC to LTV from this customer. The LTV to CAC relation should be at least 4:1 and it's your ROI.

How can I ensure my marketing budget is effective?

To ensure your marketing budget is effective, regularly review and adjust it while tracking ROI and focusing on a primary KPI for measurement. Measure LTV vs CAC.

This approach enables data-driven decisions that improve budget efficiency.

What role do word of mouth and reviews play in marketing?

Word of mouth and positive reviews serve as powerful, cost-effective marketing tools that can greatly expand your reach and draw in more customers. Their influence is essential for building trust and credibility in your brand.

It's the cheapest and most effective marketing channel you might have. Make sure your product or service is outstanding, then the customer acquisition will need much lower marketing budgets in time.