As digital marketing continues to grow and take over market share from traditional marketing, many marketing managers and small business founders are asking how much they should be spending on digital marketing.
The U.S. Small Business Administration suggests allocating 7-to-8% of your gross revenue to marketing. Then you spend 50% of that marketing budget on digital marketing specifically.
That sounds great, but is that how it works in the real world?
According to HubSpot's research, marketing budgets make up around 13.6% of total company budgets on average across all markets. While this varies by industry and how long the company has been in business, that’s pretty reasonable and expected.
So if your revenue is $1,000,000 you can expect to spend $70,000-$140,000 on total marketing. That would bring your digital marketing budget to between $35,000 and $70,000 for the year.
That’s the quick, cursory look at marketing budgets. But what does that look like fleshed out? What should you truly expect to spend on your digital marketing, and where?
First, let’s look at some of the tools in a digital marketing strategy.
- Organic social media
- Social media advertising
- Email marketing
- Video marketing
- Podcast sponsorships
- Advertorial/sponsored content
- PR/media relations
- Premium content creation
When you add into the equation salaries and freelance costs, the money can go quickly. This is why it’s important to create an inclusive, comprehensive marketing budget based on as much data as possible.
Let’s look at some quick stats on modern marketing:
- The U.S. Small Business Administration suggests you allocate 7-8% of your gross revenue to your marketing budget.
- Digital marketing budgets average 45-50% of the overall marketing budget.
- Video marketing leads the charge in digital marketing. Video marketing usage is expected to double what it was from 2016 to 2021.
- Social media ads make up about 25% of the digital marketing budget.
Now that you have a good handle on basic numbers, tools in a digital strategy, and some stats, it’s time to dive in and set a budget.
Step 1: Calculate Your Company Revenue
Gross Revenue is revenue received before any deductions or allowances like rent, cost of goods sold, taxes, etc.
Estimated Revenue is the amount of earnings projected for a given time period.
If you see a big difference, go with the smaller number. You’ll be better off erring on the conservative side of the numbers.
Know this number. You may need to ask your accountant or sales team for help to figure it out, but it’s the critical component of setting your digital marketing budget.
Step 2: Determine the Ideal Marketing Budget Range
If your business is relatively new, like a startup or less than five years old, consider allocating 12-20% of gross revenue to marketing. This is more than what established companies should assign.
As the new and unknown player in the game, you’ll need to make a name for yourself and your products/services. Marketing should be a key focus with companies that are just starting out.
If your brand is more established, older than five years old, should allocate between 6-12% of their revenue to marketing.
Want to see this in action?
Example 1: Company Alpha has been in business for ten years. For the past two years their average gross revenue has been $1,000,000 each quarter, or $4,000,000 per year.
This means Company Alpha’s ideal marketing budget should be around $60,000 – $120,000 per quarter (or $240,000 – $480,000 per year). If half of that gets allocated to digital marketing, that’s $120,000-$240,000 in a year.
Example 2: Company Omega is just getting started. They just opened their doors last week and have projected that they’ll make $25,000 per quarter, or $100,000 this first year.
This means Company Omega’s ideal marketing budget should be around $3,000 – $5,000 per quarter (or $12,000 – $20,000 per year). Digital marketing would then cost $6,000-$10,000 this year.
You’ve seen how this works. Now let’s dive into how to spend those dollars.
How Should You Allocate Your Marketing Budget?
You know the landscape for marketing is more complex than ever. You feel it everyday. So do we.
So where should you allocate marketing budget across channels online and offline? And, how should you spread out those funds across each of the various channels?
It’s always helpful to start at the beginning. Begin by looking into what works and what doesn’t work in your marketing.
How do you measure your marketing efforts right now? Do you track where leads are coming from? Are you mapping the conversion paths (or steps) that turn those leads into clients or customers?
That baseline information is essential to establish measurable marketing. But there are a few more critical steps that will help you to understand what turns a stranger into your customer:
- Define your benchmarks. This way you can understand what positive ROI really means for your company.
- Understand the quality of your lead types. Each lead has an effect on your revenue. Not all leads are created equal, so understanding this can help you focus where it’s most effective.
- Learn what data your sales team uses. How does the sales team convert leads into customers?
- Determine your ideal client profiles or buyer personas. Figure out which lead types that will generate the most revenue and align with the ideal direction of your business.
- Understand the time it takes for a lead to become your customer. This number can differ drastically from business to business and helps you see the importance of every conversion.
- Trace the buyer’s journey of your current customers. Understand how they went from having a problem to being your customer and everything that shaped that journey.
With a data-driven foundation, you get to understand how buyers find your company. Then you can discover who’s actually making a purchase and at what point leads seem to be considering a solution to their pain points. Plus you’ll know where you need to be to reach them with your marketing.
You Need Multiple Touchpoints to Connect with a Leads
On average a customer uses six touch points when making a purchase. These touch points include both online and traditional, so it’s best not to abandon offline marketing just yet.
To get into the mindset of your potential customers, your leads, make sure that you’ve gone through and mapped out the buyer’s journey to clearly define where your ideal touch points are— both online and offline.
Which Marketing Strategies & Tactics Are Getting The Best Results?
In one survey of 2,500 digital marketers, participants reported on what marketing activities generated the best ROI. While this particular survey is from 2017, channels have continued to show similar trends.
As you can see, email marketing still leads the way with the highest percentage of Excellent and Good ROI results reported, with social media marketing following closely behind.
Marketing automation and other digital technologies are proving effective at bringing together the most effective marketing tactics—email marketing, organic search, social media marketing and content marketing—along with data and analytics to achieve better results.
Changes in Traditional Versus Digital Marketing Spend
This chart, also from cmosurvey.org, shows the sharp contrast between digital growth and offline decline.
For the last five years, investments in traditional advertising have consistently dropped by single digit percentages each year.
Digital marketing spend, by comparison, has consistently grown by double digit increments year after year.
This means businesses are shifting their marketing spend.
What used to be spent on radio, television, and newspaper is now being spent on search, email, and social.
This trend is expected to continue for the next several years.
A few years back, eMarketer projected that in 2017, TV ad spending would total $72 billion, or 35.8% of total media ad spending in the U.S. Conversely, total digital ad spending in 2017 was predicted to top $77 billion, or 38.4% of total ad spending. And it happened. This was the first time in history digital spend surpassed TV ad spend in the U.S.
And the gap has only widened—by 2020, digital spend will surpass television by 36%.
Percentage of Marketing Budget Spent on Digital
Digital marketing budgets are just a portion of total marketing spend for most businesses. Brands who rely more heavily on the internet to generate sales like an ecommerce business invest a greater percentage of their marketing budget towards digital.
While the latest Forrester Research report projects that digital marketing spending will make up 45% of all ad spend in 2020, that figure will vary depending on a variety of factors including industry, growth plans and local market.
For more traditional businesses, which rely on offline AND online activity to fill the sales funnel, a healthy mix of marketing investment is to be expected.
Across all sectors, digital marketing budgets have increased consistently, while traditional channels have lost ground.
Expected Changes in Social Media Platform Investments
One specific channel many businesses work in is social media marketing. In Hanapin Marketing's 2019 Paid Social report, 97% of marketers are investing in paid social advertising, up 10% from the year before.
Facebook takes the cake as the focus for most marketers, with 91% of them currently investing in Facebook. Interestingly, 26% plan to spend less on Facebook in the coming year.
Instagram (owned by Facebook) on the other hand expects to see increased investments from almost half of respondents. And 51% of marketers expected to spend more on YouTube, which has become more direct response focused.
Snapchat, which has a greener ad platform, was at the bottom of the list, with only 6% of respondents expecting to increase investments into 2020.
HubSpot dives deeper into the advertising portion of your digital marketing here: How Much You Should Actually Spend on Digital Advertising
When all is said and done, how much you should expect to spend on digital marketing depends on many factors: your revenue, the marketing channels that work for your buyers and what they cost, your overall goals and expectations for growth and more.
Remember that the U.S. Small Business Administration suggests allocating 7-to-8% of your gross revenue to marketing. Out of that, expect to spend around 50% of that marketing budget on digital marketing specifically.
And when it’s time to dive deeper into a digital marketing strategy, we’re here to help.