How much should small businesses spend on marketing?

You’ve heard about the importance of establishing an online presence for your business and you’re ready to start advertising. How much should you spend? Good news - you’ve come to the right place.

The US Small Business Administration (SBA) reports that small B2C businesses allocate 9-11% of revenue toward marketing. Forbes suggests that a monthly budget of $1,000 is a reasonable minimum advertising spend. When it comes to your marketing budget, there is no magical number or a one-size-fits-all formula. The key is to recognize that marketing spend is not a tax, but a powerful vehicle for growth (and is actually tax-deductible!). This is especially true when it comes to digital marketing. Why? Compared to any other kind of marketing, it gives you greater control over your budget and better visibility into the return on that investment. 

If you are advertising your business, it’s likely you are trying to grow your customer base. You want to ensure that your investment is working. To do this effectively in digital marketing, you need to: 1) set a measurable conversion and 2) estimate its value. This can be trickier than it sounds.

Let’s break this down through an example. Imagine you’re running a local medical spa.

1) Set a measurable conversion. Think about how people typically become your customers. Do they call your spa? Book an appointment on your website directly or fill out a form? Do they have to book ahead or can they just walk in? Note the series of actions the customer takes that lead to a transaction. If an action (calling the office, booking an appointment) is part of the customer purchase path - it’s a conversion.  

When it comes to digital marketing, any key action that leads to a purchase and can be tracked is considered a conversion - for which you can optimize. At this time, Google Ads allow you to track ad interactions, such as clicks and phone calls, along with any action people take on your website. For the sake of simplicity, we’ll skip over more advanced conversion tracking for now, such as actions on a connected site or offline data uploads.

In our example, let’s look at the conversion event of a customer calling from an ad (hopefully, to book an appointment). Now we can:

2) Estimate its value. That’s right, we’re talking monetary value. How much is this action worth to your business? 

If you spend $1,000 on advertising and it:

• Delivers 25 calls in a month ($1,000 / 25 = $40 per call)

• Of these, 10 book an appointment over the phone ($1,000 / 10 = $100 per booked appointment).

That may sound like a high cost for just booking an appointment, but let’s consider the value this brings to the business.

In our example, the medical spa offers two types of appointments, a facial and a laser treatment. Each has a different cost and different client show rates. From the 10 booked appointments:

• 5 book a $150 facial. If this appointment type has a 75% average show rate, and the operational cost is $90, we see that:  

• ($150 service - $90 expenses) * 0.75% show rate =  $45 profit per appointment

• $45 profit x 5 appointments = $225 profit 

• 5 book an $800 laser. If this appointment type has a 90% average show rate, and the operational cost is $300, we see that: 

• ($800 service - $300 expenses) * 0.90% show rate = $450 profit per appointment

• $450 profit x 5 appointments = $2,250 profit 

• Together: 

• $225 facial appointment profit + $2,250 laser appointment profit = $2,475 total profit

Considering that you spent $1,000 to get $2,475 - that’s a positive return on investment! You now also have an estimated value for a phone call lead from your Google Ads campaign. 

• $2,475 profit / 25 calls = $99 value per phone call lead

Would you spend $40 to get that next call when you know that you’re likely to make $99 from it? Instead of seeing the $40 cost, you can now focus on the $59 profit. And! This doesn’t take into account any products they purchase or future appointments they are going to book.

This can be a useful framework for planning your future marketing spend. Depending on your business capacity and revenue goals, you can size your budget accordingly. We recommend running campaigns for a minimum of 3 months to get a consistent read on the value of Google Ads to your business and to give campaigns time to ramp up and optimize.