Small Business Advertising: Are You Spending Enough?

If you haven’t yet seen the masterpiece that is Morbius, then you might be surprised to know that it didn’t do that well at the box office. Worldwide, the vampire superhero movie brought in about $164 million on a budget of around $80 million.

“But wait,” you say, “isn’t doubling its budget a good return?” Sure, if it wasn’t for the cost of advertising. Notoriously, many big-budget movies spend another 50% of their production cost solely on advertising. Suddenly, Morbius didn’t make much at all (by Hollywood metrics) once you factor in that cost.

And that begs the question: how important is small business advertising — and more specifically, how much should your business spend on marketing and getting out the word? Because if you spend too much on advertising, your profits shrink quickly. And if you don’t spend enough, your profits never actually grow.

Fortunately, there are ways to calculate what’s right for your business. 

How Do Your Marketing Costs Stack Up?

First and foremost: there’s no one-size-fits-all answer to advertising and marketing budgets for small businesses. What any business spends (and should spend) on advertising is always a balancing act. While there are certain rules-of-thumb to follow, what you spend on advertising and marketing will depend on everything from location to competition to your industry.

Let’s consider that last one first: your industry.

According to Deloitte (via brandnetic), marketing budgets can vary greatly, but most businesses tend to hover around 10-15% of their total budget. Of course, retail businesses usually have to spend more due to competition and the B2C nature of the industry, and that can be a particularly painful amount to spend.

BTW, if you’re a new business, targeting an advertising spend that’s considered average for your industry is a great way to start. As your business gets more mature, however, you’ll probably want to look at some of the following calculations.

1. Advertising-to-Sales Ratio (A/S Ratio)

Beyond keeping up with the Joneses in your industry, there’s the advertising-to-sales ratio (A/S ratio). A/S is a simple calculation: divide total ad expenses by sales revenue. While it can be a backward-looking metric by using quarterly or yearly hard numbers, you can also use projected sales revenue to make sure the A/S ratio is within the right range for your business, which is something you’ll need to determine for yourself. You can use A/S ratio to see what the past “sweet spots” have been for your business and calculate from there. 

2. Return on Investment (ROI)

What’s the ROI of your advertising expenses? To determine this, you’ll calculate just how effective each previous ad campaign has been. While it’s helpful to get an overall ROI for your marketing expenses, it’s much more informative to conduct an ROI analysis on each specific marketing tactic to see which yields the best results.

ROI is calculated by dividing the net return on an investment (i.e., profit) by the cost of that investment. 

It’s a simple calculation, but what should you be targeting?

It all depends on what type of marketing your small business is doing. For Google Ads, a common benchmark is 200% ROI—earning back $2 for every $1 spent. For Influencer marketing, businesses have seen about a 500% ROI on average according to some reports. And good old radio ads somehow claim to have a 1200% ROI. 

3. Customer Acquisition Cost (CAC)

While Customer Acquisition Cost (CAC) entails more than just advertising (it can also include the cost of your sales team closing the sale, for example), it’s still a great metric to keep an eye on to prevent your ad spend from going wild.

In general, as your brand grows, your CAC should trend lower — it should take less effort/money to bring in new business, although this metric can spike due to events like entering a new market or during the holidays.

Calculate CAC by adding up your total cost of marketing and sales associated with acquiring new customers. Then dividing that amount by the number of newly acquired customers. While businesses are usually considered in-range if the cost to acquire a new customer is ⅓ of the total amount a customer spends throughout the relationship with your business (their lifetime value).

How Much Should Your Business Spend On Advertising?

Really, there’s no firm answer on how much any small business should spend on advertising. Instead, the best way to determine you’ve hit the advertising budget nail on the head is to test things out, watch your numbers (you can use Lendio’s accounting software to keep track of what you’re spending and how much you’re earning, too), and continually tweak and optimize to ensure you’re getting the best results from your advertising and marketing dollar. 

_{The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. Any content provided by our bloggers or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything. The information provided in this post is not intended to constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.}