An often-quoted benchmark for small business advertising is to allocate 2 percent of your sales revenue for advertising. However, we asked Sageworks, a financial information company, if that figure was still accurate. We asked what is the average amount small businesses spend on advertising.
Calculating How Much Small Businesses Spend on Advertising
According to Libby Bierman, Analyst at Sageworks, “Sageworks’ data shows that the average small business invests about 1 percent of its revenues into advertising. It may not sound like a significant expense, but the rate has been steady for the past few years.”
Thus, if your sales are $500,000 annually, 1 percent would mean spending $5,000 on advertising. If your sales are $2 million annually, then 1 percent would mean budgeting $20,000 on advertising.
She pointed out that this average masks a lot of differentiation on what small businesses spend on advertising. Small businesses in certain industries spend significantly more than 1 percent.
One industry that spends heavily on advertising is retail. “Within retail, privately held furniture stores and jewelry stores with less than $10M in annual revenue invest more than 4 percent of revenue back into advertising. It may be that these firms see advertising as a critical driver of foot traffic, a big arbiter of their success,” adds Bierman.
Certain industries allocate significantly less toward advertising. Among those are manufacturing firms, which spend just 0.7 percent of their sales revenue on advertising, and wholesalers which spend just 0.6 percent on advertising. “These other small businesses may be investing more in staff, technology or inventories instead of advertising,” says Sageworks’ Bierman.
Small Businesses Spend on Advertising
Source: Sageworks Data – 12 months ending 8/31/2017
|Advertising To Sales||Industry Code|
|4.44%||4421 – Furniture Stores|
|4.16%||4483 – Jewelry, Luggage, and Leather Goods Stores|
|3.84%||5312 – Offices of Real Estate Agents and Brokers|
|2.87%||6116 – Other Schools and Instruction|
|2.73%||3121 – Beverage Manufacturing|
|2.18%||7139 – Other Amusement and Recreation Industries|
|2.16%||4422 – Home Furnishings Stores|
|1.99%||8121 – Personal Care Services|
|1.93%||7225 – Restaurants and Other Eating Places|
|1.88%||4452 – Specialty Food Stores|
|1.85%||5242 – Agencies, Brokerages, and Other Insurance Related Activities|
|1.83%||8122 – Death Care Services|
None of the above numbers are intended to be a hard and fast rule. It’s never a good idea to just pick the average amount small businesses spend on advertising and use that as the only factor to set your small business advertising budget.
Yes, you should take into account what other small businesses spend on advertising. But also consider factors specific to your business, such as:
- Past experience — what has worked in your business before?
- Your marketing objectives — what are the forms of media and places to advertise that meet your objectives, and what will it cost to drive results there?
- Size and stage of your business — if your business is a startup with just $200,000 in revenue, you may decide to spend 10 percent of your revenue during the first six months. You consider it an investment to jumpstart more sales.
- The competitive landscape — where do your competitors advertise and how much will it take to stand out from the competition?
For example, if you operate a consumer services business such as pest control, then you may decide to spend considerably more than 1% on pay-per-click ads such as AdWords. In fact, in competitive industries, the cost per click may be through the roof. You may have to pay more just to get results. But you also may see measurable ROI in the form of immediate sales. By tracking costs and conversions, you know that by spending $X in pay-per-click ads you can get $Y in sales each month. You might have built these pay-per-click costs into your pricing and be perfectly comfortable spending five percent of your revenue on advertising.
Let’s take another example. If you run a niche B2B consulting business which typically has a complex and long sales cycle, then pay-per-click ads may not work – for a lot of reasons. Your potential clients are probably not looking for a solution in Google or Bing. And they have to get comfortable with you, rather than buy immediately based on a click. In that case, your money could be better spent on other forms of marketing such as content marketing using lead collection forms. And your advertising budget might be small and focused on social media advertising or sponsored content. Your advertising might be limited to boosting your content and lead collection activities.
The best way to make sure you are spending wisely is to have a well-thought out plan. Plan out your marketing. As part of your marketing plan, identify where you want your message seen or heard and what you want to accomplish with it. Then stick to your plan. Buying ads because it seems like the thing to do or because you got a great sales pitch thrown at you, is a recipe for wasting money.
One final point about setting an advertising budget: don’t put all your eggs in one basket and make advertising your entire marketing budget. There are many other forms of marketing that are valuable. You’ll get the most bang for your buck by using advertising along with other forms of marketing.
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