How Much Should You Spend on Marketing? (Not 7%. Here's the Real Math.)
The SBA says 7 to 8 percent of revenue, with fine print nobody repeats: it assumes a 10 to 12 percent net margin. For a $3M business that's $225,000, and it has nothing to do with your business. The budget is jobs you want × leads per job × what you can afford per lead. Here's the math.
Somebody told you to spend 7 percent of revenue on marketing, and they never asked what a customer is worth to you.
For some businesses that number is twice too much. For others it's not even close. The percentage is an output, not an input. Your budget is three numbers you already know: how many jobs you want, how many leads it takes to get one, and what you can afford to pay for a lead.
Don't know your contact rate or close rate? The Revenue Leak Calculator works them out and puts a dollar figure on each of the five numbers. Two minutes, free, nothing to sign up for.
I run a door company in Dallas-Fort Worth, and I run Hivelead, where I help owners of $1M to $5M businesses figure out why they stopped growing. This one answers a question I get at almost every first meeting: how much should I actually be spending on marketing?
The SBA rule: 7 to 8 percent of revenue
Here's what you'll find when you search it. The Small Business Administration says 7 to 8 percent of revenue if you're under $5 million. Every article repeats it.
So a $3 million business gets told to spend $225,000 a year, and the owner either laughs, because he's spending $40,000, or panics, because he's spending $40,000.
The fine print: it assumes a 10 to 12 percent net margin
Here's the part that gets left out. The fine print on that rule says it assumes your net margin is already 10 to 12 percent after expenses.
It was written for a business that's already working. If your chain is leaking, more budget doesn't fix it. It runs more money through the leak. Why More Leads Won't Fix Your Business covers that.
The percentage is an output, not an input
You don't start with a percent of revenue. You start with three numbers and the budget falls out the bottom.
Number one: how many more jobs do you want?
Not more revenue. Jobs. If you want to add $300,000 in revenue and your average job is $3,000, that's 100 jobs.
Number two: how many leads does it take to get one job?
That's your contact rate times your close rate. Reach two out of three, close one in three of those, and it takes about four and a half leads per job. So 100 jobs is 450 leads.
Number three: what can you afford to pay for a lead?
This is the one everybody skips, and it's the one that makes the percentage meaningless. Your ceiling is your average job, times your gross margin, times your close rate, divided by three. What's a Good Cost Per Lead? walks through it.
A $3,000 job at 40 percent margin is $1,200 in gross profit. Close one in three, that's $400 per lead. A third of that is your ceiling: about $130 a lead.
Multiply: your real budget
450 leads at $130 is about $58,000. That's your marketing budget. Not 7 percent of anything. The number the business can actually afford, to buy the growth you actually want.
Look what it does for the two owners from the beginning. The one spending $40,000 and laughing at $225,000? He's close. He needs to go to $58,000, not $225,000, and now he knows why. The one panicking? Same answer. The rule scared him with a number that had nothing to do with his business.
If you want the distinction between what a lead costs and what a customer costs, Cost Per Lead vs Cost Per Acquisition covers it.
When the budget isn't the problem
This math also tells you when the budget isn't the problem.
Say your ceiling comes out at $27 a lead, because your average job is $600, and leads in your market cost $100. No budget fixes that. Seven percent, twenty percent, it doesn't matter. You can't buy leads at $27. The problem is the job size, not the spend. Your Cost Per Lead Isn't the Problem. Your Average Job Is. covers the fix, and How to Get Higher-Paying Clients covers where the bigger job comes from.
Want to see which side of your ceiling you're on? The Revenue Leak Calculator puts a dollar figure on each of the five numbers. It's free and there's nothing to sign up for.
The rule: spend to your ceiling, not to a percentage
For a business your size the rule isn't a percentage. It's this: spend as much as you can at a cost per lead under your ceiling, pointed at a chain that holds the volume.
If leads are under the ceiling and the chain holds, spend more. Even past 7 percent, even past 10, because every dollar is coming back with a margin on it. If leads are over the ceiling, don't spend more. Fix the ticket or the chain first. And if you've already cut spend and watched revenue fall faster, Why Cutting Your Ad Budget Made It Worse explains why.
A monthly check, not a yearly decision
The budget isn't a yearly decision. Cost per lead moved? Rerun the math. Average job went up because you started taking commercial work? Your ceiling went up, and so did your budget. The percentage rule is static. Your business isn't.
This is also the number that makes marketing ROI mean something: you're measuring return against a budget built from your own economics, not a rule of thumb.
Jobs × leads per job × what you can afford per lead
Marketing budget isn't a percentage. It's jobs you want, times leads per job, times what you can afford per lead. Run yours. Then spend to that number, not one that somebody picked for a business they've never seen.
FAQ
How much should a small business spend on marketing?
Not a percentage of revenue. Multiply the number of new jobs you want by the leads it takes to win one (1 ÷ contact rate × close rate), then by what you can afford to pay per lead (average job × gross margin × close rate ÷ 3). For a $3M business adding $300K at a $3,000 average job, that's about 450 leads at a $130 ceiling, roughly $58,000, not the $225,000 the 7 percent rule produces.
Is the 7 to 8 percent marketing budget rule accurate?
It's a rule of thumb from the SBA for businesses under $5M, and it assumes a net margin of 10 to 12 percent, which most struggling businesses don't have. It doesn't account for what a customer is worth to you, so it overspends for low-ticket businesses and underspends for high-ticket ones. Build the budget from your own three numbers instead.
What if the math says I can't afford any leads?
Then the budget isn't the problem. If your ceiling is $27 a lead and leads cost $100, no spend level fixes it. The constraint is the average job size. Raise what each lead is worth by changing which jobs you take and which customers you market to, then rerun the math.
How often should I revisit my marketing budget?
Monthly. The budget depends on cost per lead, close rate, and average job, and all three move. If lead cost rises or your average ticket goes up, your ceiling and budget change with it. A percentage rule is static; your business isn't.
Sources
- U.S. Small Business Administration (Caron Beesley), "How to Set a Marketing Budget that Fits Your Business Goals and Provides a High Return on Investment," archived via Internet Archive: https://web.archive.org/web/20150908011221/https://www.sba.gov/blogs/how-set-marketing-budget-fits-your-business-goals-and-provides-high-return-investment
Related reading
Run the math on your real business
If you don't know your contact rate or your close rate, the Revenue Leak Calculator figures them out and puts a dollar figure on each of the five numbers, so you can run this math on your real business instead of a rule of thumb. Two minutes, and it's free and there's nothing to sign up for.
Found this useful? Tell Google to show you more like it.