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.
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Small Businesses Spend on Advertising Source: Sageworks Data – 12 months ending 8/31/2017 |
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| 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 |
| 1.08% | All industries |
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.
Read the complete Small Business Advertising Guide:
- Introduction to Small Business Advertising
- How Can Advertising Help Your Business?
- What Is The Difference Between Advertising And Marketing?
- Where Can You Advertise Your Business?
- What’s The Cheapest Way To Advertise?
- Where Can You Advertise For Free?
- How Much Do Small Businesses Spend On Advertising?
- How to Plan your Small Business Advertising Campaign (Checklist)
- 50 Small Business Advertising Ideas
- How to Advertise Your Small Business Locally
Photo via Shutterstock
Mohammed Alkhambashi
Advertising can helps the business to growth faster, and most of the companies use their techniques to improve the sales of their products. at this time, the advertising become easier for the companies, because the social media became helps and can cost the companies less than the old way of advertising. if the business wants to grow and many people know about the business, should focusing about the advertising.
Rita Perdue
Would like to know if that’s per month or per year. Also, what do you think the spend in for really SMALL businesses that gross $30-50K per year? $100K per year?
Aira Bongco
I think that a majority of the budget goes to advertising especially for a new business. This helps get it off the ground.
Great content.
The ideal thing is, whether you are reinvesting 2%, 1% or 5% into advertising, make sure you are doing it rightly where it will convert most.
Build a tribe as you progress and gather enough social proof to make you spend less and make more money.
Thanks for sharing.
Emenike
The title is misleading – it should leave out the word “marketing” because the article addresses only the Advertising budget. Advertising is only a part of Marketing, and the Marketing budget.
The 1% rule of thumb for Advertising spend is extremely outdated in the current climate. With the abundance of advertising everywhere, to spend only that small amount for ads is not enough to gain traction and break through the noise. 1% is not enough to drive revenue, nor is it enough to cover rising advertising costs due to shortage of ad space inventory. For example, Facebook ads used to be fairly cheap, now not so much.
The US Small Business Administration recommends a Marketing and Advertising budget of 7%-8% of Gross Sales, which is the average for small businesses. Most businesses will have a higher percentage, closer to 10%. Also, Startups must allocate a larger budget for Marketing and Advertising so that consumers would be made aware of that startup business, in the range of 15%-20% the first year. And in a competitive field, 20%+ is not unheard of as a budget for Marketing and Advertising. How this budget is allocated between general Marketing efforts (online and offline) and Advertising (creative and ad spend) is up to the business, but generally the split should be 65/35 or 60/40 Marketing/Advertising depending on goals.
You’ve got to spend money to make money.
I agree with you that you’ve got to spend money to make money. I’ll like to add that you if you don’t know what you are doing and you just spend money all in the name that you want to make money, you will end up going bankrupt.
In business, you must be strategic about how you spend your advertising budget. That’s the right way to go without losing money.
Tad Timothy
This article is mostly misleading. I’ve worked with dozens of B2B, and B2C businesses making less than 2 million per year that will spend over$20k on one tradeshow or event. In my experience, in order grow from survival mode to successful mode it takes 8-12% executed by a talented CMO, or team. The onset of technical requirements needed to be an effective inbound and outbound marketer is higher than ever. When your swimming in a red ocean, better be ready to compete and win.
Anita Campbell
Tad, this information is accurate because it is actual data (not a survey). It’s what companies report on their taxes, for advertising and marketing expenses.
Best practices, please meet reality.
What you’re describing is the ideal world. And while I might agree with you in many respects about how business owners should look at things, what this data is measuring is what really happens in the wild. Many small businesses simply rely on word of mouth and don’t do much of any marketing. So the fact that they advertise at all is significant, I believe. 🙂
Thanks for the insights; much appreciated. Anita
Advertising for a small business is something that should be approached with caution.
I have done a number on a few small businesses I have come across and one thing kept recurring: limited funds.
For a small business to run an effective advertising campaign, it should be approached strategically and at places it would yield a good ROI.
Advertising should as well be seen as an investment into the business, and not just an expenditure.
Great content as always.
It is a different perspective.