Marketing budget for a small business: how much is appropriate?
The common rule of thumb is five to twelve per cent of revenue. It is so general that it is useless for any individual company — a two-person firm with high order values and a retail shop share the same percentage and have entirely different needs.
In short
- A percentage of revenue is the wrong starting quantity. More useful is working backwards: how many customers do you need, and what may one cost?
- Three quantities determine the amount: order value, customer value over the relationship, and the length of the sales cycle.
- Four items share the budget — and the largest is usually not the one people expect.
- In the build-up phase the budget is considerably higher than in steady operation. Set both the same and you underfund the start.
Working backwards
Instead of setting a percentage and hoping it is enough, working backwards produces a figure you can defend. Four steps:
- How many new customers do you need this year? The revenue target divided by the average order value — minus whatever comes from existing customers.
- How many qualified enquiries is that? Number of customers divided by your close rate. At 25 per cent, twenty customers need eighty enquiries.
- What may one enquiry cost? As an upper limit: that amount times the number of enquiries per customer must not exceed the contribution margin of the first order — and should stay well below it.
- Multiply. Number of enquiries times permitted cost per enquiry gives the budget for new customer acquisition.
| Step | Worked example |
|---|---|
| Revenue target from new customers | 300,000 |
| Average order value | 15,000 |
| New customers needed | 20 |
| Close rate | 25 per cent |
| Qualified enquiries needed | 80 |
| Permitted cost per enquiry | 400 |
| Budget for new customer acquisition | 32,000 |
The figures are an example, not a recommendation. What matters is that every row comes from your own values — and that the second-to-last row is a deliberate decision rather than something adopted.
Worth knowing
The permitted cost per enquiry depends more on customer value over the relationship than on the first order. If you keep customers for four years on average, you may spend a multiple of what the first order alone would justify.
That is exactly why "how long do our customers stay" is a budget question rather than a service question. Two companies with identical order values can justify entirely different budgets — if one keeps its customers twice as long.
The four items
1. Working time — usually the largest
Your own hours and external providers. In small companies typically 50 to 70 per cent of the total budget when counted honestly.
Underestimated because your own time is not invoiced.
2. Media budget
Paid ads, sponsored posts, directory listings. 10 to 30 per cent — often considerably less for companies growing through content.
Overestimated because it is the most visible item.
3. Tools and licences
Sending system, CRM, analytics, imagery, fonts. 5 to 15 per cent, with a tendency to grow unnoticed.
Needs an annual review: which of these was actually used last quarter?
4. One-off work
Website rebuild, photography, design foundations. 0 to 25 per cent, varying strongly between years.
Belongs on its own line, or it distorts the year-on-year comparison.
Building up costs more than running
The most common planning mistake is a flat budget across years. In fact the requirements differ considerably:
| Phase | Focus | Budget need |
|---|---|---|
| Year 1 – build-up | foundations, first content, website | high, with a lot of one-off work |
| Year 2 – expansion | regularity, a second channel | medium, mostly working time |
| Year 3 onwards – operation | upkeep, refinement, growth | plannable, steady |
The most common mistake in allocation is not the amount but the split: the entire budget goes into acquisition and none into retention.
Yet the second order from an existing customer is nearly always considerably cheaper than the first from a new one — the contact details exist, the trust exists, the process is known. Reserving ten to twenty per cent of the budget for existing customers lowers the average cost per order more sharply than any optimisation of acquisition.
How to tell the amount is right
- Too low if measures regularly get abandoned before they could take effect — with search engines, that means before six months.
- Too high if cost per customer won exceeds the contribution margin of the first order with no demonstrated repeat value.
- Badly allocated if more than half goes into tools and one-off work and little into ongoing effort.
- Right if the inflow figure points the right way across three quarters and you can sustain the measures.
Work out an appropriate marketing budget with me. Work backwards, not as a percentage of revenue. Our figures: - Revenue target from new customers next year: [amount] - Average order value: [amount] - Contribution margin per order in per cent: [details] - Close rate from qualified enquiry to customer: [per cent] - How long customers stay on average: [details or "unknown"] - Length of the sales cycle: [details] - Which phase: [build-up / expansion / operation] - Internal hourly rate: [amount] - Available own hours per month: [number] Tasks: 1. Work through step by step: new customers needed, qualified enquiries needed, defensible cost per enquiry, total budget. Show every intermediate figure. 2. If customer value over the relationship is unknown: say how strongly the result depends on it, and calculate two variants. 3. Split the budget across the four items – working time, media, tools, one-off work – appropriately for our phase. Count my own hours in. 4. Reserve a share for existing customers and justify the amount. 5. Name the two assumptions that change the result most, and how we would notice after two quarters that the budget was too low or too high. Do not invent industry benchmarks.
In closing
A percentage of revenue does not answer the question, because it ignores the three quantities that matter: order value, customer value over the relationship, and cycle length. Working backwards takes an hour and produces a figure you can defend.
Two things get overlooked most often: your own working time is usually the largest item, and a share belongs with existing customers — where every unit of currency is cheaper than in acquisition.
Common questions
How much marketing budget does a small business need?
That cannot be answered as a percentage of revenue. More useful is working backwards: new customers needed from the revenue target, then qualified enquiries via the close rate, plus a defensible cost per enquiry — multiplied, that gives a budget you can defend.
Which items belong in a marketing budget?
Four: working time (your own and external, usually 50 to 70 per cent), media budget for paid visibility (10 to 30 per cent), tools and licences (5 to 15 per cent), and one-off work such as a website rebuild or photography. The largest item is nearly always working time — and it is the most often forgotten.
Why can you not plan the build-up year like operation?
Because the first year creates foundations that cost money once: website, first content, design basics. Plan the build-up year with an operating budget and you get a half-finished foundation — and wrongly conclude from its weak effect that marketing does not work in your case.
How much may an enquiry cost?
As an upper limit, cost per customer won must not exceed the contribution margin — where what counts is not the first order but customer value across the whole relationship. If you keep customers for four years on average, you may spend a multiple of what the first order alone would justify.
How do you recognise a budget that is too low?
By measures regularly being abandoned before they could take effect — with search engines, before around six months. Too small a budget does not produce slower growth but a series of half-built approaches, none of which has got past its run-up period.
Marketing that sets itself up
The Studio Engine beta is live. Claim your spot and help shape it from the start.
Join the beta →