How Much Should a Small Business Spend on Marketing? An Honest Answer

"How much should a small business spend on marketing?" is one of the first questions owners ask me. And the internet has a ready answer: some percentage of revenue. Pick a number, multiply, done.

I get why that's appealing. But a percentage doesn't tell you what to spend it on, and that's where most marketing budgets go wrong. Here's the common rule, what's actually behind it, and how I'd set a budget instead.

What's the rule of thumb for marketing spend?

You'll find a "7 to 8 percent of revenue" figure attributed to the U.S. Small Business Administration all over the web. When I went looking on SBA.gov, the clearest guidance I found was more careful than that.

An SBA article on marketing budgets from 2019 says there's no hard and fast answer, and that many businesses use a percentage of revenue as a guide (projected revenue if you're a startup). It cites outside figures that range widely: about 1 percent of revenue on advertising for the average business, and 7.9 percent of revenue on total marketing in a 2018 report, with consumer-facing businesses spending more than business-to-business ones.

Why percent of revenue falls short

The percentage rule has three problems for a small service business.

• It's backwards. It sets spending by last year's revenue, not by what you want next year. A company trying to add two trucks needs a different budget than one that's happy where it is.
• It ignores customer value. A roofer whose average job is $12,000 can spend far more per lead than a cleaning company whose average visit is $180.
• It lumps everything together. "Marketing" includes ad spend, the labor to run it, and the tools. Those behave very differently.

Split your budget into three buckets

This is the part most owners miss. Your marketing budget isn't one number. It's three.

The common mistake is putting everything into ad spend and nothing into labor. That's how you end up with $3,000 a month going to Google and nobody checking the search terms. Ad spend without management is the most expensive kind.

The opposite mistake is paying an agency for "management" and getting very little actual work. I wrote about that in why you're paying $4,000 a month for four blog posts.

Start from goals and customer value instead

Here's the better way to answer how much to spend on marketing. Work backward from the jobs you want.

1. Step 1

   Know what a customer is worth

   Average job value, and how often customers come back. A maintenance plan customer is worth a lot more than one service call.

2. Step 2

   Set a growth goal

   How many more jobs a month do you want, and can your crew actually handle them?

3. Step 3

   Know your close rate

   Out of every ten leads, how many become jobs? Your office probably has a rough feel for this.

4. Step 4

   Work out what you can pay for a lead

   From job value, margin, and close rate, figure the most a lead can cost and still make you money.

Then your budget becomes a math problem with real numbers instead of a guess.

Don't have exact numbers? Rough ones are fine. Ask your office manager how many calls turned into booked jobs last month. Look at your invoices for an average ticket. Close enough beats a percentage pulled from the internet.

Example: an $800,000 home services company

Let's run it for a made-up company. Say you own Gateway Comfort Heating and Air, a four-truck HVAC company doing $800,000 a year. These numbers are illustrative, not benchmarks.

• Average job: $900, with some much larger installs mixed in.
• Goal: 15 more jobs a month during the slower seasons.
• Close rate: about 4 out of 10 leads book.
• Leads needed: roughly 38 a month.

If those leads cost about $35 each in ad spend, that's around $1,300 a month in ads. Add someone to run the ads, keep the Google listing active, and publish content that brings in free search traffic over time. Add a little for tools. Here's how that might break down:

Gateway Comfort, about $3,400 a monthillustrative

Ad spend $1,300 Labor $1,875 Tools $225

Notice what happened. We landed near 5 percent of revenue, which is inside the range people quote. But we got there by asking what the business needs, and every dollar has a job.

And over time, the content and Google listing work lowers how much you need to lean on ads, because more leads come in through organic search and the map listing.

What different monthly budgets realistically buy

Here's my honest read on what different total monthly budgets can do for a small service business. This is from my experience, not a study, and your market and competition will shift it.

If you're at the low end, start with the 2-hour-a-month plan. It costs time, not money.

Where my pricing fits

Since I'm writing this, here's my number so you can do the math. Modern Marketing STL charges $125 per production hour with a 15-hour monthly minimum, so $1,875 a month for the labor bucket. Ad spend is separate and goes straight to Google or Facebook on your own card. Meetings are free, there's no setup fee, and it's month-to-month. Full details are on the pricing page.

That's not the right fit for a business that should be in the DIY row. I'd rather tell you that than take your money.

How to tell if your budget is working

A budget is only right if you can see what it returns. Check these monthly:

• Cost per lead. Total spend divided by calls and forms.
• Cost per booked job. The number that actually matters.
• Lead sources. Ads, map listing, website, referrals. Where are jobs really coming from?
• Missed leads. Calls and forms that never got a response. See missed calls cost more than bad ads.

If cost per booked job is well under what a job earns you, spend more. If you can't measure it, fix tracking before you spend another dollar. That's the honest answer.