How much should a small business spend on marketing?

Ask ten people how much a small business should spend on marketing and you will hear the same answer from most of them: somewhere between five and ten percent of revenue. It is a tidy figure, it sounds authoritative, and for a great many small businesses it is close to useless.

A new business with no revenue cannot spend ten percent of nothing. A firm with a waiting list does not need to spend ten percent of anything. A shop with thin margins that spends ten percent of revenue on advertising may be spending its entire profit to stand still. The percentage is not wrong. It simply answers a different question from the one you are asking.

This article sets out how we help small businesses arrive at a marketing budget that fits their situation: what it has to cover, how to work it out from the numbers you already have, how to divide it between channels, and how to tell whether it is working. It is written for owners who have to justify every line of spend to themselves, because that describes almost every small business we work with.

The short answer

Work out what you can afford to pay to win one new customer. Work out how many new customers you need. Multiply the two, add the fixed costs of running your marketing, and that is your budget. Then compare it with the percentage of revenue rule as a sense check rather than as the starting point.

For most established small businesses with healthy margins, that calculation lands somewhere between five and ten percent of revenue, which is why the rule of thumb exists. New businesses and those trying to grow quickly often need considerably more for a period. Businesses with plenty of repeat and referral work often need less.

The rest of this article explains each part of that calculation, because every number in it hides a decision.

Why the percentage of revenue rule is only a starting point

Percentage of revenue budgets are popular because they are simple and because they scale automatically. When the business grows, the budget grows with it. When revenue falls, spending falls, which feels prudent.

The trouble is that the logic runs backwards. Marketing is supposed to produce revenue, yet the rule makes revenue decide how much marketing you do. In a quiet year, when the business most needs new customers, the budget shrinks. In a busy year, when you may already be turning work away, it grows.

The rule also ignores margin. Ten percent of revenue is a modest sum for a consultancy keeping sixty percent of every invoice as gross profit. It is a crippling sum for a retailer keeping fifteen percent. Two businesses with identical turnover can afford wildly different marketing budgets.

And it ignores what you are trying to achieve. A business that wants to hold its position needs to replace the customers it loses each year. A business that wants to double needs to find far more new customers, faster, and usually has to pay more for each one as it reaches beyond its most obvious audience.

Use the percentage as a sense check. If your calculated budget is two percent of revenue and you want to grow quickly, question whether it is enough. If it is twenty five percent and you are not in a deliberate growth phase, question what it is being spent on. But build the budget from the business, not from the rule.

Work backwards from what a customer is worth

The most useful single number in small business marketing is the amount you can afford to spend to win one new customer. Everything else follows from it.

Start with gross profit, not revenue

A customer who spends two thousand with you is not worth two thousand. Take away the direct cost of delivering the work, the materials, the subcontractors, the stock, the staff hours, and what remains is the gross profit that customer contributes. That is the pot from which marketing has to be paid.

Then look beyond the first sale

Many customers buy more than once. A salon client returns every six weeks. A business that hires an accountant usually keeps them for years. A homeowner who has a kitchen fitted may later want a bathroom, and will recommend you to neighbours either way.

Estimate the gross profit a typical customer produces over a sensible period. For most small businesses, the first twelve months is a practical and cautious window. Longer periods are more accurate for businesses with very loyal customers, but they also require you to wait longer to recover what you spent.

Decide what share of that you are willing to spend

If a new customer produces six hundred in gross profit over their first year, you would not want to spend six hundred to win them, because you would make nothing. Most small businesses aim to spend somewhere between a fifth and a third of first year gross profit to acquire a customer, leaving the rest to cover overheads and profit.

So in that example, somewhere between about one hundred and twenty and two hundred per new customer would be a reasonable ceiling. That figure is your target cost per customer, and it is the number every channel and campaign should be judged against.

Turn it into a cost per enquiry

Not every enquiry becomes a customer. If you win one job for every three enquiries, and you can afford one hundred and eighty per customer, you can afford roughly sixty per enquiry. That is the number that matters when you look at an advertising report, because advertising reports count enquiries, not customers.

If you do not know your conversion rate from enquiry to customer, start writing it down. A simple tally of enquiries received and jobs won each month tells you more about your marketing than most dashboards.

How many new customers do you actually need

The second half of the calculation is volume. How many new customers does the business need over the next year?

Start with where you want revenue to be, then subtract what existing customers will reliably bring in. Repeat business, retainers, contracts and regular clients all count. What remains is the gap that new customers have to fill.

Divide that gap by the value of a typical new customer and you have a target number of new customers. Add an allowance for customers you will lose during the year, because every business loses some, and they have to be replaced before you can grow.

Now multiply the number of new customers by your target cost per customer. That is the variable part of your marketing budget: the money that goes on actively finding new people.

This calculation frequently produces a surprise in one of two directions. Some owners discover they have been spending far more than their growth target required. Others discover that their ambitions need two or three times what they had assumed. Both are useful discoveries, and both are better made on paper than after a year of spending.

What a marketing budget has to cover

Small business marketing budgets often go wrong not because the total is wrong but because it was only ever meant to cover one thing. The owner budgets for advertising, then discovers that the website needs work, the tracking is broken, the photographs are poor and nobody has time to run anything.

A realistic budget covers several categories.

• The website. Building or rebuilding it is a one off cost, spread over its useful life. Hosting, security, updates and small changes are ongoing. Our guide to what a web design agency should actually cost covers the build side in detail.
• Media spend. Money paid directly to advertising platforms for clicks, views or placements.
• Management. Whoever runs the campaigns, writes the content, manages the social accounts and reports on results. This is either a fee or somebody's salary and time.
• Creative production. Photography, video, design and copywriting. For social advertising in particular, this can be a substantial share of the total.
• Tools and software. Email platforms, booking systems, scheduling tools, call tracking, design software. Individually cheap, collectively noticeable.
• Your own time. Rarely budgeted, always spent. Hours spent posting on social media or wrestling with an advertising account are hours not spent on paid work.

When you compare your budget with a percentage of revenue, include all of these. A business that spends five percent on advertising but also pays for a website retainer, a photographer and several tools may already be spending eight or nine percent in practice.

The fixed costs that come first

Some marketing costs need to be paid before variable spend on advertising or content can work properly. Skipping them to put more money into advertising is one of the most common and expensive mistakes we see.

A website that converts

Every channel sends people to your website eventually. If it loads slowly, fails to explain what you do or makes it awkward to get in touch, it quietly reduces the return on everything else you spend. Improving the enquiry rate from one percent of visitors to two percent halves the cost of every enquiry, across every channel, permanently. No other single investment does that. If you suspect your site is leaking enquiries, why your website gets traffic but no enquiries walks through the checks.

Tracking that works

Without reliable measurement, you cannot tell which spending produces customers and which does not. Setting up conversion tracking for forms and phone calls is neither expensive nor glamorous, and it is the foundation of every budgeting decision that follows. Getting it wrong is extremely common, as we explain in the conversion tracking mistake in most ad accounts.

A complete local presence

For businesses serving a local area, a complete and actively maintained Google Business Profile costs nothing but time and frequently produces more enquiries than paid advertising. Accurate details, real photographs, a steady supply of reviews and prompt replies to them belong in the first month of any plan.

Maintenance

A website that is never updated becomes slower, less secure and more likely to break. Plugins go out of date, forms stop sending, certificates expire. A modest monthly maintenance arrangement is a small, predictable cost that protects every other marketing investment from failing silently.

Budgets by stage of business

The right budget depends heavily on where the business is. Three broad stages cover most small businesses.

New businesses

A business in its first year or two has no customer base generating repeat work and no reputation producing referrals. Almost every customer has to be found from scratch, which makes marketing proportionally expensive.

It is common and sensible for a new business to spend a much larger share of early revenue on marketing than an established one would, sometimes well above twenty percent, because the alternative is not having enough revenue to measure a percentage against. Plan for it as part of the start up cost, alongside equipment and premises, rather than expecting it to be funded from revenue in the first months.

Spend first on the foundations: a clear, credible website, a complete business profile and working tracking. Then spend on the channel most likely to produce enquiries quickly, which for most service businesses is paid search. Our article on whether to start with Google Ads or SEO covers that choice.

Established and steady

A business with several years of trading, a loyal customer base and a steady flow of referrals needs marketing mainly to replace lost customers and fill gaps. For these businesses, the traditional five to ten percent range is often about right, and sometimes less is enough.

The risk here is complacency. Referral work is excellent until a key referrer retires or a competitor arrives. A modest, consistent budget spent on visibility, reputation and staying in touch with past customers protects against that without requiring large sums.

Deliberately growing

A business trying to grow substantially, into a new area, a new service or simply a larger size, has to find customers faster than word of mouth can supply them. Those customers are also more expensive, because the easiest ones are already yours.

Growth budgets are often between ten and twenty percent of revenue for a period. The key word is period. A growth budget should be tied to a specific goal and a specific timescale, with clear points at which you check whether it is working, rather than becoming the permanent level of spending.

How to split a small budget across channels

Once you know the total, the next temptation is to spread it thinly across every channel, a little on Google, a little on Facebook, a little on Instagram, a little on a local magazine. With a small budget, that almost guarantees none of it works well enough to learn from.

Concentrate first

Start with the channel most closely matched to how your customers find businesses like yours. For services people search for when they need them, that is search: your business profile, organic search and paid search. For visual products or offers people discover by browsing, it is social media. For businesses that sell to other businesses, it may be direct outreach, networking and a professional presence online.

Put enough into that one channel to produce a result you can measure. Only when it is working, or clearly not, should you add a second.

Keep a small reserve for testing

A common and effective approach is to put most of the budget into what is proven to work, a smaller portion into improving it, and a small reserve into testing something new. The exact proportions matter less than the principle. Proven channels pay the bills. Tests find the next proven channel.

Do not neglect the customers you already have

Winning a new customer usually costs far more than persuading an existing one to buy again. Yet many small businesses spend their entire budget on strangers and nothing on the people who already trust them.

Email marketing to past customers, reminders when a service is due, a simple request for reviews and referrals, and occasionally an offer for returning clients all cost very little and often produce the cheapest revenue in the entire budget.

Three example budgets

The figures below are written without a currency because we work across several markets and the proportions matter more than the amounts. They illustrate how a budget might be divided, not what yours should be.

Around 1,000 a month

At this level, focus is essential. A sensible split for a local service business might be most of the money into a tightly targeted paid search campaign on the single most profitable service, a small amount on website maintenance and tracking, and the owner's own time spent on the business profile, reviews and emailing past customers. Management would either be very light or done by the owner. There is not enough here to run social advertising and search advertising properly at the same time.

Around 3,000 a month

This allows a properly managed paid search campaign with enough spend to learn from, ongoing work on the website and organic search such as new service pages and local content, and either regular email marketing or a modest social presence. It is enough to run two channels well, or one channel very well with room to test a second.

Around 8,000 a month

At this level, a business can run paid search, organic search and one social platform properly, with professional creative for the social activity and regular content for the website. It can also afford to test new areas or services without risking the core. Management becomes a larger absolute cost but a smaller share of the total, because the same amount of expertise is being applied to a larger spend.

What these examples share

In each case, the foundations come first, the budget is concentrated on the channels most likely to work, existing customers receive attention, and management is treated as a real cost rather than something that happens for free. You can see how we price comparable work on our pricing page.

How the budget changes by type of business

The method above works for any small business, but the shape of the result varies considerably by sector. Three common types illustrate the differences.

Trades and local services

Plumbers, electricians, builders, cleaners, landscapers and similar businesses usually have customers who search when a need arises, often urgently. Most of the budget belongs in search: the business profile, reviews, service pages for each area covered and, where competition is strong, paid search. Social media plays a supporting role, mainly showing finished work to people who have already heard of you. Because a single job can be worth a great deal and customers often return or refer others, these businesses can usually afford a relatively high cost per enquiry.

Retail and ecommerce

Shops, whether physical or online, typically work on thinner margins and smaller order values, which makes the cost per customer calculation far tighter. Repeat purchases are critical, because a first order often barely covers what it cost to win. The budget should therefore give serious weight to email, loyalty and returning customers, not only to acquisition. Visual products usually suit social advertising, supported by high quality photography and video, and product searches suit shopping adverts on search engines. Advertising spend as a share of revenue is often higher in ecommerce than in services, which makes accurate tracking of profit, not just revenue, essential.

Professional services

Accountants, solicitors, consultants and agencies usually sell considered purchases with long relationships. A new client can be worth a great deal over several years, which justifies a meaningful cost per client. Buyers research carefully, so the budget should favour credibility: a strong website, detailed content that demonstrates expertise, reviews and case studies, and a visible professional presence. Referrals and networking often produce the best clients, and marketing should support them rather than replace them, for example by making sure a referred prospect finds a convincing website when they look you up.

Spending you cannot measure precisely

Not everything worth doing produces a tidy line in a report. A business that only funds activity with an immediately traceable return will gradually become invisible to everybody who is not searching for it at that moment.

Reputation, recognition and familiarity build slowly and pay back indirectly. A customer who has seen your name on social media for a year, noticed your vans around town and read a helpful article of yours is far more likely to choose you when the need arises, even though the enquiry will be recorded as a search for your business name. That enquiry was produced by the whole year, not by the search.

The practical answer is to keep most of the budget accountable while allowing a modest, deliberate share for activity that builds recognition over time, such as consistent, well made social media, useful content and presence in your local community. Judge it by broader signals: searches for your business name, direct visits to your website, the proportion of customers who say they already knew of you, and the ease of winning work compared with a year earlier.

Keep this share honest. It should be a conscious choice with a limit, not a label for spending that simply has not worked.

Where small businesses waste marketing money

Most waste is not dramatic. It is a steady leak through habits that seemed reasonable at the time.

• Spending on traffic before fixing the website. Paying to send people to a page that does not convert is the most expensive mistake in small business marketing.
• Spreading too thin. Five channels at a token level each, none producing enough data to improve.
• Buying advertising on reach rather than results. Directory listings, magazine adverts and sponsorships sold on how many people might see them, with no way to know whether anybody acted.
• Leaving advertising accounts on default settings. Broad keyword matching, automated recommendations and network placements that suit the platform more than the advertiser.
• Paying for tools nobody uses. Subscriptions started for a campaign two years ago and never cancelled.
• Posting on social media without a purpose. Hours each week producing content that is not designed to reach anybody new or bring anybody back.
• Stopping too early or continuing too long. Ending a campaign after a fortnight because the first enquiries were expensive, or running an unprofitable one for a year out of hope.
• Measuring the wrong things. Followers, impressions and rankings reported as success while enquiries and customers go unmeasured.

Review your current spending against this list before adding anything new. Most small businesses find at least some money that can be redirected to something that works.

How to test before you commit

A budget based on estimates is a hypothesis. The quickest way to replace guesses with real numbers is a small, controlled test.

Set the terms in advance

Before spending anything, decide what you are testing, how long it will run, how much it can spend and what result would count as success. A good test might be: paid search for one service in one area, for three months, with a set monthly budget, aiming for enquiries at or below the cost per enquiry you worked out earlier.

Writing this down prevents two opposite errors: abandoning a test because the first week looked poor, and continuing indefinitely because you cannot decide.

Give it enough money to mean something

A test that produces two enquiries tells you very little, because two is too few to separate a real pattern from luck. Budget enough to generate a meaningful number of enquiries, which depends on your market's click prices and your site's conversion rate. If that amount is beyond your means, narrow the test further rather than running a starved version of a broad one.

Change one thing at a time

If you launch a new website, start advertising and begin posting on social media in the same month, and enquiries rise, you will not know which change produced them. Stagger changes where you can, so each one can be judged on its own.

Seasonality and when to spend

An even monthly budget suits accounting but rarely suits the market. Most businesses have busy and quiet periods, and customer demand rises and falls with the seasons.

Spending more when demand is naturally high usually produces more customers for the same money, because more people are searching and buying. A garden landscaper spending evenly all year puts money into winter months when few people are planning gardens. A tax adviser spending evenly misses the months when demand peaks.

At the same time, some quiet periods are worth spending into, particularly if competitors pull back and advertising becomes cheaper, or if your offer can create demand, such as off season discounts or booking ahead for the busy period.

Plan your annual budget as a total, then allocate it across months according to when your customers buy. Look back at last year's enquiries by month if you have them. Consider when people start researching, not only when they buy, because a wedding supplier's customers begin searching many months before the date.

How to measure whether the budget is working

A marketing budget is only as good as your ability to tell whether it is paying for itself. That does not require sophisticated software. It requires a few numbers, recorded consistently.

The numbers worth tracking monthly

• Total marketing spend, across every category, including management and tools.
• Enquiries, by source where you can identify it.
• New customers won, again by source where possible.
• Cost per enquiry and cost per customer, overall and by channel.
• Revenue from new customers, even if only estimated.

Ask every customer how they found you

Analytics tools miss a great deal. Somebody sees your advert, searches your name days later, and arrives through what looks like organic search. Somebody else sees your van, looks at your Instagram, then phones. Asking each new customer how they heard about you and recording the answer fills gaps that no tracking system closes.

Judge over the right period

Different activity pays back over different timescales. Paid search can be judged within a few months. Organic search and content take much longer. Brand building and reputation take longer still. Judge each on its own timescale rather than expecting everything to pay back within the month it was spent.

Keep a one page monthly review

The most useful reporting tool for a small business is a single page, updated once a month, that anybody in the business could read in two minutes. One row per channel. Columns for spend, enquiries, customers won, cost per enquiry and cost per customer. A final line for the totals and a short note on what changed that month and what you plan to change next.

Kept consistently for a year, that page becomes the most valuable document in your marketing. It shows which channels improve over time and which stall, how seasonality really affects demand, and what a customer truly costs you rather than what you assumed in January. It also makes conversations with any agency or freelancer far more productive, because you arrive with your own numbers rather than relying entirely on theirs.

If a supplier cannot help you fill in that page each month, that tells you something important about the service.

When to increase the budget and when to cut

A budget set in January should not be fixed until December. It should respond to what the numbers show.

Signs you should spend more

• A channel is producing customers well below your target cost per customer, and has capacity to produce more.
• You are consistently limited by budget rather than by demand, for example when your adverts stop showing partway through the day.
• You have spare capacity to take on more work and a proven way to find it.
• A competitor has left the market or pulled back, making attention cheaper.

Signs you should cut or redirect

• A channel has run for its agreed test period without approaching your target cost per customer.
• You are turning work away. Spending to find customers you cannot serve damages your reputation.
• Enquiry quality has fallen, with more time wasters and fewer customers per enquiry.
• Your website or tracking has broken, and money is being spent without being measured or converted.

When cutting, cut the least effective activity first, not everything equally. When increasing, increase gradually, because the cost of each additional customer usually rises as you reach beyond the most responsive people.

Agency, freelancer or in house

How you resource your marketing affects both the budget and the result. Each option suits different businesses.

Doing it yourself

The cheapest option in cash and the most expensive in time. It suits businesses at the very start, owners with genuine interest and some skill, and simple, local marketing such as a business profile, reviews and emailing past customers. It suits complex paid advertising much less well, because inexperienced management can waste more in media spend than an agency would charge.

A freelancer

Often good value for a specific skill: running an advertising account, writing content, managing social media. The limitation is breadth. One person rarely covers website, search, advertising, social and email equally well, so you may end up coordinating several freelancers yourself.

An agency

More expensive per hour, but typically covering several disciplines under one roof, with one plan and one report. It suits businesses running more than one channel, those without time to coordinate specialists, and those who want the website and the marketing to work as one system. Choose one that will show you the numbers, give you ownership of your accounts and tell you when something is not working.

In house

Hiring a marketing person makes sense once the budget and workload justify a salary. For most small businesses, that point comes later than expected. A single generalist hire often works best alongside an agency or freelancers for specialist work, rather than replacing them.

A simple budgeting worksheet

If you do nothing else after reading this, work through these steps with your own numbers. It takes an hour and will tell you more than any rule of thumb.

1. Write down the average gross profit a new customer produces in their first twelve months.
2. Decide what share of that you are willing to spend to win them, typically a fifth to a third. That is your target cost per customer.
3. Write down how many enquiries it takes, on average, to win one customer. Divide your target cost per customer by that number to get your target cost per enquiry.
4. Write down your revenue target for the next twelve months and subtract what existing customers will reliably provide.
5. Divide the remainder by the value of a typical new customer, and add an allowance for customers you expect to lose. That is the number of new customers you need.
6. Multiply the number of new customers by your target cost per customer. That is your variable marketing budget.
7. Add the fixed costs: website, maintenance, tracking, tools, creative production and management.
8. Compare the total with your revenue. If it is far outside five to ten percent, check whether your growth target, your margins or your stage of business explains the difference.
9. Allocate the budget across months according to when your customers buy, and across channels according to how they find you, concentrating rather than spreading.
10. Decide the date on which you will review the numbers and adjust.

A marketing budget built this way is not a guess dressed up as a percentage. It is a set of assumptions you can test and improve, month by month, until the numbers are based on your business rather than on anybody's rule of thumb. If you would like a second pair of eyes on yours, we are always happy to look, and to say so if you are already spending enough.