There’s nothing worse than looking at the bottom line at the end of a quarter or year and realizing your business didn’t make as much as you wanted. After 16+ years of working with small businesses, I’ve identified 7 common marketing budgeting trends that keep owners from the success they want.
Small Business Marketing Budget mistakes stem from unclear goals, unrealistic investment expectations, and lack of business performance data. Unclear goals lead to mismanagement of spending. Inadequate budget allocation leaves teams without the resources they need to succeed. Accurate performance data provides accountability to ensure any spent budget is generating the success you want as an owner.
Having a solid grasp of these concepts for your business is the difference between disappointment and building a business you are proud of, that impacts your community and provides for your family.
The 7 Marketing Budget Mistakes:
- Mistake 1: Not Having a Marketing Budget
- Mistake 2: Out-of-touch Marketing Budget
- Mistake 3: Ignoring Attrition
- Mistake 4: Not tracking or reporting on performance
- Mistake 5: Unclear or Misaligned Goals
- Mistake 6: Underfunded Marketing Budget Size
- Mistake 7: Unknown Cost of Acquisition
- Additional information
Let’s jump in, so you don’t make these mistakes!
1. Not Having a Marketing Budget
One of the most common reasons businesses fail is due to lack of money to pay for day-to-day operations. In fact, 82% of small business failures are due to issues with cash flow. Businesses just run out of money.
One way to track if you have enough cash to operate is to have a budget.
This budget will include what you need for payroll, raw materials, merchandise, manufacturing supplies, and growth (sales & marketing budget).
Without a marketing budget for growth, a business can easily under-spend or overspend.
Under-spending on growth functions can lead to situations where not enough cash flow is generated to pay for operations.
- Your team won’t have the tools they need to be effective, like a CRM or information materials. Or possibly just not being paid enough to be motivated to do the job.
- Underinvestment in advertising can see your campaigns fail to reach an audience big enough to be effective and remain unprofitable.
Over-spending can leave an organization in the same boat.
- Paying for tools that are too expensive can leave the remaining budget too small to accomplish anything else.
- Spending more on ineffective growth efforts is just a cash drain.
Having a budget will ensure you’re spending what you can and should for your goals and operation size.
A budget alone doesn’t create a positive environment. Budgets require accountability and consistent updating, which we’ll cover in an upcoming section.
2. Out-of-Touch Marketing Budget
A business should update its marketing budget each year, if not each quarter, based on yearly/quarterly growth goals, current client base, changes in operational costs (payroll, materials, etc), and inflation.
When first starting a business, it can be easy to find your initial set of clients and customers with very little cost. You’ve probably been sharing your desire to strike out on your own for a while and have a core group of self-identified prospects eager to pay you for your results.
As you grow, it gets harder and you have to start spending to earn new customers. That’s why 90% of small & mid-sized businesses spend on marketing. At least, 37% of small businesses plan to increase their digital marketing spend in the next 12 months. (Source)
Expecting a business to grow and maintain current levels on the same budget year-over-year will lead to disappointment and strain, especially when it comes to marketing.
If your business has a goal to grow 10% year-over-year, then next year’s goal will be larger than the last. If you don’t apply more funds, then you’re asking a team to do more with less.
For example, a company in year 1 generates $500,000K in revenues. In year 2, they set a goal to grow 10% to $550,000K. In year 3, they want to grow another 10%.
In year 2, 10% growth is $50,000.
In year 3, 10% growth is $55,000.
We’d be asking a team to generate $5,000 more in revenue than the previous year with the same budget.
If the growth budget does not meet the needs to generate this increase, then we’re setting up our teams to fail.
Does that mean the growth budget needs to increase 10%?
To identify a healthy and realistic budget a business should use its historical data and forecast “cost of acquisition” to determine proper funding levels.
You could also look at this from a perspective of attrition.
3. Ignoring Attrition in the Marketing Budget
Attrition is the rate at which a business loses customers over a period of time. Each industry has its own common attrition average, and every business should strive to understand its unique attrition rate. To achieve growth, invest in a marketing budget to replace expected losses and add new business.
For example, in the residential cleaning industry, the average retention rate in 2018 was around 67%. Let’s round up to 70% to make the math easier.
This means to just maintain current levels of revenue a residential cleaning business needs to replace 30% of its customers each year. To grow, it needs to bring on even more.
If a marketing budget only takes into account the 10% growth and ignores attrition, it will shrink by 20%.
100 customers * 10% = 10 customers
100 + 10 (growth) – 30 (Attrition) = 80 Customers
This means part of the marketing growth budget must be used to replace customers you are expecting to lose.
To accomplish this type of planning, an organization will need data on its past performance.
4. Not tracking or reporting on performance
We can’t stress how many times we’ve asked a potential client about current return on investment, conversion rates, & retention rates, only to learn they have no system in place to hold their growth teams or spending accountable.
This aligns with recent surveys, which report that only 40% of small business owners feel they are extremely or very knowledgeable about accounting and finance.
“Wait, marketing and growth is different from accounting and finance,” I hear you say.
What does marketing generate? New business!
What is the metric we track related to new business? Revenue! (& Profit).
How do we know growth is effective? Revenue goes up. And Profit ((revenue – expenses)/revenue) is positive and possibly growing.
This means that tracking numbers effectively, at least at the bottom line, can shed light on the performance of marketing efforts.
Take a step up from the bottom-line by using marketing analytics to track specific spending and impact of specific channels, like advertising, social media, email marketing, on outcomes like lead generation, online purchases, even store visits.
With regular reporting and tracking you can know:
- if your ads are profitable or just a cash suck.
- If you need to divert funds from lead generation to retention
- If you should hire better marketing partners
Just tracking isn’t enough. It requires regular reporting and scrutiny to keep your budget effective. I recommend weekly reviews of “the numbers” as this cadence ensures efforts don’t get too far afield before needing correction.
What might need correcting?
- Daily/monthly advertising spending
- Starting new sales or promotions
- A landing page design improvements
The more time you put between reports, the slower your businesses will be at recovering & pivoting to a more successful strategy.
To pivot, a company first needs a clear set of goals.
5. Unclear or Misaligned Goals
Did you know “just 5% of small businesses achieve all of their yearly goals?”
That’s not to say 95% didn’t meet any of their goals. This survey of over 500 small businesses found that only 65% of businesses met more than half of their goals.
Goals are meant to guide a business and its team toward an outcome. If these businesses had goals, why did so many miss the mark?
Unclear or Misaligned goals!
What is an unclear goal?
An unclear goal is often difficult to measure. It may be hard to tell if the goal has been reached and, more importantly, a challenge to execute.
To illustrate, let’s say our goal is to “Bring on better customers.”
If this is meant to guide my team, it is very unclear.
First, what is a “better” customer? Do they spend more? Do they have a mindset that makes it easier to work with them?
Second, how many customers? Is 1 new customer enough to accomplish this goal?
Third, does this imply we are going to stop working with current clients that don’t meet the standard of “better?”
As you can see, there is enough uncertainty that makes it hard to take any kind of specific action. This can lead to wasted spending both on campaigns and service delivery to the wrong type of client.
Instead of wasting budget on unclear goals, make your goals S.M.A.R.T.
S.M.A.R.T. goals make it very clear what actions will need to be taken. Therefore, you and your team will know how to more effectively spend your budget.
What is a misaligned goal?
A misaligned goal is out of step with reality or the current situation. Many of you may have read books or articles about setting stretch goals or large 10x goals, so I’m going to use that as a basis for this example.
Say we have the goal, “Grow our customer base by 100% in the next quarter through organic growth, zero advertising, and no offers” (I’m exaggerating to make a point.)
Doubling the size of your business is already a difficult and grueling task, let alone expecting your growth team to accomplish it with little to no awareness efforts, or motivating offers , AND in a time frame that’s only 90 days long.
Depending on the current size and market share of your business, this could be very difficult due to the remaining viable market. Not having a matching budget to accomplish the goal only handicaps your team’s ability to see it through.
Misaligned goals can lead to inefficient budget spending or not enough budget to accomplish the goal, which leads to the next mistake.
6. Underfunded Marketing Budget Size
When budgets are not set to match goals, the only outcome is underperformance and disappointment. So instead of waiting to be disappointed, set a realistic budget.
This came up during a conversation with a business owner who believed they could grow to be a million dollar company within the next 90 days.
At the time of our conversation, he was a $150,000 per year business and had a marketing budget of around $1,000 per month. Which isn’t far off from the national average of around $10,000 per year, but is it enough to achieve his goal?
The average cost of acquisition for their industry is between $125-250 per customer.
With an average monthly client spend of $100, he would need to add 709 new monthly recurring customers to reach $1 million, not counting attrition.
(($1,000,000 – $150,000) / 12 months ) / $100 Average Monthly Customer Spend = 708.33 Customers
According to their industry averages, that would cost a little more than $88,600 over 90 days. That’s a far cry from $1000 per month.
Even if this goal was for the full year, a budget of $12,000 is quite short of the forecasted $88K.
To avoid this, set your budget using growth goals and cost of acquisition to ensure you’re properly funding your ambition.
7. Unknown Cost of Acquisition
As the previous section highlights, understanding your cost of acquisition can be a powerful tool toward setting effective budgets. Cost of Acquisition (CoA) is the amount of money required to earn a new customer.
Cost of Acquisition can include spending on:
- Salaries & Payroll
- Tools & Platforms (CRM, Email Marketing, etc)
- Advertising Costs
You can use Cost of Acquisition to determine your marketing budget, even if you already have yours calculated.
Say you want to grow 20% and you currently generate $750,000 in revenue. This means you need to add $150,000 in new revenue. If you have a 10% attrition rate, you’ll need to add $75,000 for a total of $225,000 in new revenue.
If an average customer is worth $1500/year, then you need to find 150 new customers.
Now, just multiply 150, by your CoA and you have the basis for a growth budget.
This method has a few benefits as it accounts for:
- Salary & Payroll
What this does not account for is spending on retention of current customers. So, if this is a function of your current marketing team, be sure to include this in your planning to properly set your marketing budget.
What should I spend my marketing budget on?
Marketing budgets should be spent on growth driving efforts that can include:
- Team & Talent
- Data, Analytics & Technology
- Internal Culture Promotion
- Reputation management
- Training your marketing team
- Content Marketing, SEO, Social Media
- Retention of Current Customers
- Advertising & Sponsorships
What is a reasonable advertising budget for a small business?
The SBA recommends between 1-4% of gross revenue. I have worked with organizations who budget anywhere between 5-15%, depending on market size, industry, competition, and their growth goal. Business can find success with advertising at various levels of investment.
How much should you pay for marketing?
When deciding on outsourcing your marketing, you should work with a trusted partner to create a system that fits your budgets and goals. Our monthly all-inclusive marketing services start around $2000/mo + advertising & media acquisition costs. Digital advertising management is $120 + 10% of spend. Request a capability deck for more information on average costs and outcomes.
Is it worth it to hire a marketing agency?
Business owners should consider hiring a marketing agency. A marketing agency will provide you a team of experienced marketers that can get your results faster than trying to figure it out on your own. Outsourcing will free up your time to run your business. Outsourcing can help keep payroll costs down as the marketing agency will have a team already on staff to handle your needs and you won’t need to hire an advertising expert, email marketer, or graphic designer.