How Much Should a Typical Small Business Spend on Advertising?

How Much Should a Typical Small Business Spend on Advertising | Online Marketing Help
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Advertising and promotional strategies are crucial for the success of any small business.

With limited resources compared to large corporations, small businesses need to be strategic in determining how much to allocate towards advertising activities.

An effective advertising strategy can help drive brand awareness, attract new customers, improve sales, and communicate key messaging.

However, dedicating too many resources to advertising can also be detrimental if not done right.

This comprehensive guide will examine how much a typical small business should spend on advertising based on industry data and research.

Factors that influence ideal spending levels, like business size, industry, stage of growth and more, will be explored.

Additionally, an overview of traditional and digital advertising avenues, steps for setting an advertising budget, metrics for measuring effectiveness, and tips for optimisation will be provided.

Case studies of impactful advertising campaigns by real small businesses will illustrate best practises.

Table of Contents

Define 'Small Business'

Before determining the ideal advertising budget, it is important to define what constitutes a small business.

The Small Business Administration (SBA) designates a small business as having fewer than 500 employees for most manufacturing and mining industries and less than $7.5 million in average annual receipts for most non-manufacturing industries.

However, over 90% of U.S. businesses have fewer than 20 employees.

For the purpose of this article, we will focus our analysis on businesses with 100 employees or less and average annual receipts of less than $10 million.

This captures micro-businesses (less than 10 employees), small office/home office businesses (SOHO), small retail establishments, professional service firms, franchises, and other core small business segments.

The Importance of Advertising for Small Businesses

Advertising allows small businesses to increase brand awareness, reach new audiences, and drive sales.

For small companies with limited marketing budgets, advertising is often one of the most effective ways to grow and compete with larger players in the industry.

Consider these vital benefits of investing in advertising:

Build Brand Awareness: Advertising gets your brand name and message in front of potential new customers. This increases awareness, familiarity, and trust in the brand.

Acquire New Customers: Advertising helps you reach consumers who may not already be familiar with your brand or product offerings.

Display, paid search, and social media advertising, in particular, allow laser-targeted outreach to your ideal audience.

Engage Existing Customers: Existing customers may need to be reminded about your brand and offerings.

Advertising helps keep your brand top of mind while educating people about new products or promotions.

Increase Sales: The ultimate goal is driving revenue growth. Well-targeted, well-designed advertising compels consumers to make a purchase or helps move them through the sales funnel.

Improve Share of Voice: Advertising allows you to capture a greater portion of voice and visibility in your industry. This is key for competing with larger players.

Support Other Marketing: Advertising augments the performance of other channels like content, SEO, and email marketing by increasing awareness.

Improved advertising can provide tremendous value in reaching the right customers, driving brand affinity, and ultimately boosting sales and revenue.

For most small businesses, advertising is a necessary component of the marketing mix.

The key is determining how much budget to allocate based on your specific goals and targets.

Key Factors That Impact Small Business Advertising Spend

When determining advertising spending, small businesses must take into account factors specific to their business situation, including:

Industry – Businesses in industries with high customer acquisition costs, like legal, financial services, and healthcare, tend to have higher ad spending. Retail, restaurants, and consumer services have more moderate spending.

Business Model – Ecommerce businesses rely heavily on digital ads to drive web traffic and conversions. Service businesses need to spend on brand building. Ad intensity varies across models.

Stage of Growth – Early-stage businesses need a high level of advertising investment to launch and get traction. More mature businesses can moderate ad spending to focus on retention.

Revenue Size – While there is no fixed percentage, businesses with higher revenues can dedicate more dollars to advertising. Budgets expand with revenue growth.

Profit Margins – Businesses with high gross profit margins have more room in their budget to fund advertising. Low-margin businesses have less flexibility.

Seasonality – Businesses with seasonal revenue peaks may advertise more heavily during high seasons and reduce spending during slower periods.

Competition – In markets with intense competition, increased advertising spending is often needed to stand out. Less competitive spaces may require less ad intensity.

Marketing Mix – Businesses using other marketing channels like content, SEO, email, and social media may need relatively lower advertising investment.

While these factors impact budgets, small businesses still need guiding benchmarks to inform their strategy.

Things to consider for Small Businesses in Advertising

Here are some important things to consider before you consider advertising for your small business:

Understanding Your Goals and Budget

Before determining how much to spend on advertising, it’s important to clarify your goals and business context.

Ask yourself:

  • What are your key business objectives? Growing brand awareness Driving web traffic or foot traffic? Generating leads or sales?
  • Who is your target audience, and what media do they consume?
  • What is your current customer acquisition cost?
  • What is your advertising budget? Factor in both financial resources and internal bandwidth.

Aligning your ad spend with concrete goals and KPIs will allow you to better measure effectiveness and ROI.

A brand awareness campaign will need a different budget and tactics than a campaign geared towards lead generation, for example.

Be sure to take a holistic view of your marketing strategy as well—advertising should complement your organic efforts like SEO, content marketing, and partners.

Allocate budgets across different strategies that work together to achieve your goals.

Research Industry Benchmarks

Industry research and benchmarks can provide useful guidelines when deciding on advertising budgets.

While each business is unique, understanding what competitors invest in or typical budget ranges for your industry can provide a helpful perspective.

According to surveys, small businesses across industries spend an average of 6-12% of their revenue on total marketing activities. Of that, around 2-15% is allocated towards advertising specifically.

Here are some useful benchmarks for typical industries:

Retail: 5-15% of revenue on advertising

Restaurants: 2-3% of revenue

SaaS: 12-18% of revenue

Ecommerce: 10-12% of revenue

Home Services: 7-12% of revenue

To customise your business, you can research competitors or brands you admire in your space.

Review their advertising channels, frequency, reach, and estimated spending. With your business size and revenue, you can estimate what budget is realistic yet competitive.

Consider Your Business Stage and Size

Businesses at different stages require varied advertising strategies and budgets.

Startups need to focus on brand building, while mature companies may focus more on retention.

Industry data shows that, on average, small businesses should spend:

Startups: 10-35% of revenue

Growing: 7-15% of revenue

Mature: 3-5% of revenue

Startups investing in customer acquisition may operate at a loss initially.

However, excessive ad spending can quickly consume bootstrapped budgets.

Be lean and targeted early on, allocating the budget to key channels that reach your core audience.

For growing companies, moderate and consistent ad investment builds momentum without overspending.

Assess opportunities across new customer acquisition, existing customer retention, and brand building.

Mature businesses can dedicate smaller portions of revenue to advertising, focusing on retention, cross-sells, and maintaining a brand presence.

Business size also impacts budgets.

SMBs with over 100 employees invest more in advertising than microbusinesses with under 10:

1-10 employees: 5% of revenue

20-99 employees: 11% of revenue

100-499 employees: 13% of revenue

Match your spending to both business stage and size for optimal impact.

Affordable Advertising Options for Small Businesses

Affordable Advertising Options for Small Businesses

For small businesses with limited budgets, here are some of the most affordable and effective advertising channels to consider:

  1. Google Local Ads: These are low-cost search ads that target local buyers based on relevant keywords. They can generate calls, location visits, and more.
  2. Facebook Paid Ads: This option allows you to create highly targeted ads on Facebook and Instagram with an adjustable budget. It is great for ecommerce businesses or lead generation.
  3. Sponsorships at Local Events: This provides affordable exposure to targeted local audiences and works well for various types of small businesses.
  4. Content Marketing: Utilise owned channels like blogging and social media to build your brand and drive organic traffic.
  5. PR: Earn positive brand exposure by pitching journalists and securing media placements. It is a great brand-building option.
  6. Direct Mail: Although traditional, direct mail can still be effective for certain types of local promotions, such as coupons or grand openings. It can be inexpensive for targeted mailings.
  7. Radio Ads: Radio ads are often cheaper than other media channels and provide regional exposure, making them suitable for local brand building.
  8. Trade Show Booths: This option allows for targeted promotion to industry buyers at relatively reasonable conference budget levels.
  9. Digital on a Dime: Utilise low-cost website, email, and social media optimisation techniques to improve organic growth.
  10. Business Directories: Ensure your presence in listings and directories to be found locally online and offline. It is a good, low-cost strategy.
  11. Referral Programs: Motivate existing customers to promote and refer new business. This powerful word-of-mouth marketing technique can be highly effective.
  12. Sample Giveaways: Provide free samples and trials as an inexpensive method to attract new prospects and generate interest.

With some creativity, cost-effective advertising is possible even on the most modest small business marketing budgets.

Types of Advertising and Costs

There are numerous advertising mediums and formats to choose from, each with its own benefits, costs, and best use cases.

Common options include:

Digital Advertising

This encompasses ads on search engines, websites, social media, apps, and more.

Formats include:

Search Ads: text ads on Google and Bing search results. The average CPC is $1-2.

Display Ads: Banner ads on websites and blogs. The average CPM is $5-10.

Social Media Ads: Paid ads on Facebook, Instagram, Twitter, and LinkedIn The average CPM is $10-25.

Video Ads: In-stream/in-feed videos on YouTube and Facebook. The average CPV is $20-30.

Native Ads: Ad content matched to page form and function. The average CPM is $10-30.

PPC: Pay-per-click model where an advertiser pays when a user clicks. Cost varies based on competition.

Roughly 50-70% of digital ad budgets focus on search, with the rest split across social, display, video, and other formats.

Digital is popular for precise targeting and measurability. Costs are determined by competition, ad quality, and targeting.

Search Engine Optimisation

SEO aims to boost organic rankings in search engine result pages through keyword/content optimisation, backlinks, and technical site improvements. Costs include:

  • In-house SEO using staff time/tools.
  • Outsourced to an agency, typically $1,000-$5,000/month.
  • Pay-per-click models for link building/content promotion.

SEO delivers results over longer timeframes but builds brand authority and sustained traffic.

Small businesses should dedicate 15-25% of their marketing budget to SEO.

Social Media Marketing

Driving engagement on company social profiles through organic posting, contests, and partnerships.

Typical costs:

  • In-house through staff time.
  • Social media management tools: $100-300/month.
  • Ads and influencer promotions.

Social brand building costs less than ads but requires dedicated staff. Allocate 5-15% of the budget to social media marketing.

Content Marketing

Creating and promoting branded content like blog posts, videos, and podcasts. Costs include:

  • Content creation (copywriting, design, editing). Allow $100-500 per content piece.
  • Promotions such as social/email marketing and ads.
  • Potential software and tools like CMS and analytics.

Thought leadership content can significantly grow brand awareness and SEO.

Allocate 10-30% of the marketing budget to high-quality content development and distribution.

Print, TV, and Radio Advertising

Traditional direct advertising through:

  • Print ads in newspapers and magazines. The average CPM is $10-50.
  • TV and radio spot ads. The average CPM is $15-75.
  • Billboards and other outdoor ads. The average cost is $750-2,500/month regionally.
  • Direct mail postcards, catalogues, and coupons. About $0.50-2 each.

This offers broad reach but limits targeting and trackability. Limit traditional ads to 15-25% of your budget unless they are core to your audience.

Guerilla and Outdoor Marketing

  • Grassroots is a ground-level promotion like flyers, events, and sponsorships.
  • Costs depend on specific activities and volumes. Allow several thousand per initiative.

This is low-cost and personalised, but time intensive. Consider allocating 5-15% of your budget to grassroots efforts.

Measuring Advertising Effectiveness

Setting aside an advertising budget is just the starting point.
Equally important is measuring the return generated by advertising activities to optimise spending.

Key performance indicators to evaluate include:

Sales – Track revenue growth, units sold, and profitability from advertising channels. Gauge incremental lift versus baseline.

Leads – Monitor new prospects driven by each marketing initiative using UTM campaign tracking.

Traffic – Analyse how advertising boosts sessions, new users, and other website activity using Google Analytics.

Engagement – For social ads, look at clicks, comments, shares, and other engagement metrics.

Brand awareness – Run surveys with target audiences to measure changes in brand familiarity over advertising campaigns.

Customer acquisition cost (CAC) – Add up the total advertising spending required to acquire each new customer. Strive to decrease CAC.

Return on ad spend (ROAS) – Calculate revenue generated per dollar of advertising spend for each channel. Aim for at least $2 to $3 ROAS.

These metrics reveal how advertising dollars convert into tangible business growth. Measure regularly while campaigns are running and do final assessments once initiatives wrap up.

By quantifying marketing ROI, SMBs can double down on platforms delivering the highest returns.

Optimising Advertising Spend

Optimising advertising spend involves not just where to allocate the budget but also how to maximise results from every dollar.

The best optimisation practises include:

Start with interests and intent – Targeting ads to audiences researching products or showing purchase intent converts more sales.

Segment and test audiences – Split test groups based on demographics, interests, and behaviours to identify the best customers.

Refine messaging – Test ad copy, headlines, visuals, and calls-to-action thoroughly to improve conversion rates.

Automate bidding – Leverage automatic bidding algorithms in Google Ads and Facebook to optimise conversions within budget caps.

Analyse and tweak campaigns – Closely monitor performance. Make ongoing tweaks to underperforming elements.

Monitor competition – Stay updated on competitors’ advertising strategies and adjust budgets across channels accordingly.

Retarget engaged visitors – Remarket to users who previously visited your website to re-engage them.

Promote consistently, not constantly – Advertise frequently enough for sustained visibility, but avoid excessive frequency that dilutes the impact.

Only scale up proven strategies – Avoid pouring excessive budget into new tactics until initial tests prove ROI potential.

By taking an analytical approach to managing advertising programmes, SMBs gain more impact from every dollar spent.

Even a small optimisation, like better-targeted messaging, can improve conversion rates by double digits.

Case Studies of Effective Small Business Advertising

Let’s look at real examples of impactful advertising campaigns from three small businesses:

Case Study #1: Dog Treats Company

Riley’s Organic Dog Treats is a small ecommerce business selling organic dog treats.

Targeting dog owners, they tested Facebook and Instagram ads. Instagram generated a 2.5x higher return on ad spend (ROAS).

Instagram spending was then increased from $500 to $2,000 per month. That larger budget resulted in 3X more sales and a 4X increase in new customers over their prior average.

Case Study #2: Local Fitness Studio

To promote membership sales, a local spin studio ran a geo-targeted Facebook ad campaign.

They highlighted a discounted first-month membership price in their ads with a video tour of the studio.

The $800 monthly Facebook ad spend generated $4,820 in new memberships. This 601% ROAS illustrates how small businesses can drive real growth with smart digital advertising.

Case Study #3: Software Company

A B2B SaaS startup focused LinkedIn advertising on their target seniority levels and industries.

They compiled leads and sales from each of the sub-categories LinkedIn provided. The data revealed that mid-level managers in tech companies were far more likely to convert and become customers.

The startup then reallocated most of its $1,500 monthly LinkedIn ad budget to this niche audience. This increased sales qualified leads by over 40% in the following months.

These examples demonstrate that even on modest budgets, strategically optimised advertising spending can deliver exponential growth.

Every small business can and should continuously test, measure and refine their advertising approach

Conclusion

Determining an optimal advertising budget is essential for small businesses to see real results from their marketing investment.

As this guide has outlined, factors like industry, stage of growth, and annual revenue all play a key role in shaping ideal expenditure levels.

However, the most important thing is cultivating a test-and-learn culture where analytics and optimisation are continuous.

By starting small, monitoring key metrics like ROI and customer acquisition cost, and making ongoing refinements based on data, any business can steer their spending in the right direction over time, regardless of budget size.

At Online Marketing Help, our team of digital marketing experts has helped countless small enterprises just like yours establish highly effective, customised advertising strategies tailored to unique business objectives and budget constraints.

Through meticulous targeting, constant A/B testing, and an analytical approach to optimisation, we’ve delivered phenomenal growth for clients across industries.

If you’d like assistance analysing your current advertising performance, setting benchmarks, or executing a strategic plan to boost ROI from paid efforts, book a free consultation with us today.

Our dedicated advisors will work to fully understand your goals and craft personalised recommendations designed for real results.

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