It’s important to note that marketing and advertising are two different things. Marketing is the strategic planning and selling of products of services. Advertising is the promotion of a product or service in media.
Marketing would include the cost of demoing your product to potential buyers, price discounts, and sales commissions. Advertising would include the cost of running paid ads and social media campaigns, producing signage, and maintaining your website. The most common way to budget advertising is using the revenue model, i.e. advertising as a percentage of sales. This allows companies to evaluate the effectiveness of their advertising by tying revenues to ad spending.
Rule of Thumb: 5% of Total Revenues
On average, companies spend 5% of total revenues on advertising to maintain their market position. This varies by industry and by company.
In general, volume-driven companies tend to spend less on advertising than margin-driven ones. For example. Walmart spends less that 1% on marketing while Target spends closer to 2% of sales, and upscale retailers like Macy’s spend around 5%. This difference is not just due to the sheer size of Walmart; Walmart also spends less on advertising because it is priced lower than its competitors. So, low prices are part of Walmart’s marketing strategy, but its ad spend keeps consumers aware of those low prices. Pricing is broadly similar within an industry. Pharmaceutical companies, for example, spend around 11% on advertising and even more on physician detailing to promote awareness of their products. This number is high partly because pharmaceutical giants are constantly promoting new patented products in order to maintain revenues lost to generics. Automakers spend 2.5% to 5% of revenues on direct-to-consumer marketing (advertising). Package goods companies like General Mills spend 4% to 10% on advertising, but liquor companies like Smirnoff spend 5.5% to 7.5%. If you have no clue what your ad budget should be and don’t know what your competitors spend, start at 5% of total revenues and adjust upwards or downwards based on the response.
Small Business: 10% of Total Revenues
Small businesses spend a higher percentage of revenues. According to the U.S Small Business Administration, companies with under $5 million in annual revenues invest 7% to 10% of total revenues in advertising. Professional services companies spend much more on advertising, typically between 8% and 15% of total revenue.
The IRS uses a different guideline; it assumes businesses spend around $3,000 per employee. Much depends on what you are selling. Auto dealers typically spend $600 per car on advertising, whereas a personal injury law firm might spend upwards of $5,000 per month. According to a 2011 MerchantCircle survey, more than half of local merchants spend less than $2,500 a year on marketing; these businesses rely on neighborhood traffic for customers. Many small businesses operate on very tight margins. If your gross revenues are much higher than your net, the most accurate way to estimate your marketing budget is to look at what your competitors are spending. You will have to spend at least what they do in order to be visible. The process of gathering competitive research falls within the field of business intelligence. Most tools provide information about online marketing activities, not offline ones. Most are for enterprise-level companies and are expensive. However, there are a few free and low-cost tools that help give you a general picture of the competitive landscape:
Who Are Your Local Competitors?
It can be difficult to get accurate information about local competitors and the volume of business they do.
Use the Small Business Administration free SizeUp tool to see how your business stacks ups against other local companies.
Who Are Your Online Competitors?
Switch your Chrome browser to “incognito” and enter search terms to see who ranks highly for them.
Type “related.www.yourdomain.com” to find out about companies with similar domains and thus presumably similar businesses. This only works if you have a good amount of traffic.
Use Whois to lookup who owns the domain and how long it has been around. This won’t work if the domain has privacy or proxy registration.
Set up Google Alerts to monitor the web for mentions of you, your competitors, and any relevant trends.
How Much Traffic Do They Get?
The free Alexa Tool will show you about how much traffic websites get. The paid Alexa Tool will show you more detailed information about traffic and sources, including social media. A very basic plan is $10 per month; to get more insights you need to pay $49 per month.
Compete will give you more accurate in-depth information about traffic and where it comes from, including from social media. The basic plan is $199 per month but you can take advantage of a free trial.
Quantcast provides detailed information on traffic for participating websites, but websites can opt to hide their audience data from public view. It is not very useful for non-enterprise websites.
Make sure you have Google Analytics on your website so you can track your own traffic. You can’t use Google Analytics with free WordPress.com websites.
What Are Their Keywords And Links?
Organic traffic is traffic that comes to your traffic naturally when people Google a word and your website comes up in the results (SERPs results). You don’t pay for this, so it is very valuable to small businesses and is part of SEO (search engine optimization). Keywords are the words used on a website. Back links (inbound) links come from other website and tell Google that a page is important. This helps you to better in the results and is known as “PageRank.”
The Chrome browser has a ton of free tools to help you analyze your website and the websites of your competitors. It works best for established websites with a decent amount of traffic, i.e. at least 1000 visitors per month.
Install SEO Quake on Chrome and use it to analyze SEO, including keywords and keyword density, and image alt tags.
Install PageRank Status on Chrome. It will give you Alexa traffic stats, page speed, and link stats.
Firefox browser has similar tools and Safari also has some tools.
Keyword Spy gives you insights into the search volume for specific keywords and the specific websites that rank highly for them.
Use Google AdWords tools to evaluate keywords trends and popularity as well as keywords on your own site.
Moz offers the free OpenSite Explorer tool, which analyzes the links on a page. You can use it to compare your pages to a competitor’s pages. The paid tool evaluates social media rankings.
How Have They Changed Their Websites?
It can be really helpful to know how your biggest competitors have changed their websites over the years. You can see what they feel is most important for their main menus, what they want to feature as products, and how they have changed their design.
Use the Internet Archive Wayback Machine to look at cached website pages from the beginnings of the Internet.
What Are They Spending Online?
Google AdWords brings paid traffic to your website. It is useful to know if your competitors are advertising on Google and, if so, what keywords they use. For example, you might want to build out page content that includes competitor keywords.
The paid tool for Spyfu costs $79 per month but it is one of the go-to tools for knowing the keywords used by your competitors on Google (both on their website and on AdWords). It is useful for online businesses and you can sign up for a free trial.
SEMRush is an alternative to Spyfu that costs $80 per month without a recurring contract; it has no free trial.
Startups: 30% or More of Total Revenues
If you are a startup or want to introduce a new product or service, your marketing costs will be closer to 30% during your first year in order to cover one-time costs.
These costs include your corporate identity and logo, your website, a company brochure and signage. Your ongoing marketing costs will include search engine marketing, running email campaigns, and other efforts to promote your business to potential customers. Newcomers will have to spend aggressively in order to establish market share. The worst strategy is to look at what’s left after you cover overhead and take a profit. It’s best to think of marketing as an expense like any other deducted from your bottom line. Many small companies do not have substantial revenues during the first few years. Advertising will be part of the startup costs to get your business up and running.
Look at Strategy First and Cost Second
Rather than rely on percentages to determine their ad budgets, small- and medium-sized businesses should map out a marketing strategy and then budget for that strategy.
This kills two birds with one stone: you have a game plan for bringing in customers and you can prioritize the actions you take based on how important those actions are to your strategy. Marketing is a cruel mistress in the sense that marketing realities are there regardless of what your budget is. If your competitors are spending $10,000 a month on PPC ads, you may not be able to afford a similar campaign. But if you can think creatively, you may be able to outfox them. Maybe you decide to run a social media campaign instead of PPC ads. Maybe you decide to rely more on personal cold calls and leave-behind brochures. And maybe you begin by being tightly localized instead of trying to hit the market statewide or even nationally. There is always more than one way to skin a cat. A clever marketing strategy can beat dumb dollar muscles if you think things through and are disciplined in your approach. Most small businesses fail in their early years not just because they are undercapitalized, but because they rush into battle without adequate planning or a thought-out strategy.