How much money should a small business spend on advertising in relation to gross income?

Answer 1

This is one of the most common questions people ask. How much money should you spend on advertising? Some consultants will throw you a number like 8-10% of revenues. Some people would say that you need to spend whatever your competitors spend. Others will tell you that you should only spend what you can afford. There is also another school of thought that says you should determine your goal, and set the budget according to the goal.

No wonder why people get confused. Yes, there are lots of ways to determine your advertising budget, and each method works better than others in different types of industries, and different sizes of companies. For service businesses with annual revenues of $200,000 to $5,000,000, the method that works the best is 1-5% of revenues. You should spend 1 to 5% of your revenues on advertising.

This number is lower than what others might tell you, which is often times 8-10% of revenues. Why do we tell you to only spend 1-5% of revenues on advertising? Because there are other ways to market your business, and advertising is only one way to do it. You might need to re-design your web site to keep up with the times. You might need to create a referral contest to reward the customers that give you the most referrals. You might offer to treat every employee to dinner if customers rate you an average of 90% or above on your customer satisfaction survey. All these marketing activities require money, and they are in addition to your advertising budget.

That's why we only tell you to spend 1-5% of your revenues on advertising. This leads to the question…When should you spend only 1%, and when should you spend 5%? Here's the answer. If you want slow, steady growth, spend 1% of your revenues on advertising. If you want fast, steady growth, spend 5% of your revenues on advertising. None of these will make your company grow too fast. Your growth should be steady whether you spend 1% or 5% on advertising. So it comes down to how aggressive you want to be. If you want your company to experience fast, steady growth, put 5% of your revenues into advertising. If your goal is slow and steady growth, 1% of revenues would be enough.

There is something you need to watch out for, however. Just because you've spent 1-5% of your revenues into advertising does not necessarily mean that you've done a good job at advertising. You have to direct the money into effective advertising programs! There are some business owners that look at their advertising budget and say, "Hey! I've spent 5% of my revenues on advertising. That means I am doing a good job!" Well, not necessarily. Are they spending 5% of their revenues into effective advertising, or are they just wasting this money?