Setting a 2012 marketing budget: percent of revenue and channels

Most small business budgets are built backwards: a list of things the owner wants to try, added up. Build it the other way.

1. Pick the benchmark. Use the table below. The US Small Business Administration and most industry surveys land in the same ranges.
2. Adjust for your goal. Holding steady: low end. Growing 20% or more: high end or above. Launching a location, product or market: add 3 to 5 points for that year.
3. Adjust for margin. A consulting firm at 60% gross margin can spend more per dollar of revenue than a grocery at 25%. If your gross margin is under 30%, stay toward the bottom of the range and measure hard.
4. Write it down as an annual total and a monthly figure. Then allocate it. Anything that does not fit is a decision, not an accident.

Include everything: agency and freelancer fees, media spend, software subscriptions, printing, the website, trade shows and the salary share of anyone who spends more than a quarter of their time on marketing. Owners routinely undercount by leaving out staff and software and then wonder why the "7%" feels like 12%.

A few facts shape the split:

• Smartphone ownership in the US is approaching half of adults, according to Pew and Nielsen. Mobile share of website visits for most small businesses is 10% to 20% and rising every quarter.
• Google remains two-thirds of US search. AdWords clicks in most small business categories cost $1 to $5; legal, insurance and some home services run far higher.
• Facebook passed 800 million users and its ads are cheap, often under $1 per click, but they work better for awareness and local reach than for direct sales. The new Timeline for Pages is rolling out and will change how brand pages look.
• Daily deal sites such as Groupon and LivingSocial have cooled. Many businesses that ran deals in 2011 did not see repeat customers. Treat them as a one-time acquisition experiment with a strict cap, if at all.
• Print Yellow Pages usage keeps falling. Most small businesses should keep the basic listing and cut display ads.
• Email is still the highest return channel in every survey that measures it.

There is no single right split, but a reasonable starting allocation for a small business doing most of its selling locally or online looks like this:

Three adjustments:

• Selling nationally online? Shift offline down to 5% and move it into search and email. Include Google Product Search and comparison shopping engine fees under search.
• Local service business with customers over 50? Keep offline at 25% to 30%, especially direct mail to defined neighborhoods, and make sure the website and Google Places listing are in order before spending on anything else.
• B2B with a sales team? Content, LinkedIn, email and a small number of events replace most consumer channels. Trade show costs belong in this budget and are easy to underestimate.

Fix the website before buying traffic. If the site does not load quickly, show a phone number and address on every page and work on a smartphone, paid traffic is wasted. A capable small business site costs $3,000 to $15,000 in most markets; a mobile-friendly update to an existing site is often under $5,000.

Install measurement first. Google Analytics with goals configured, call tracking numbers for offline campaigns, coupon codes for print and separate landing pages for direct mail. This is cheap and it is the difference between a budget and a guess.

Test one new channel at a time. With a defined spend, a defined period and a defined success measure. Three months and $1,500 to $3,000 is enough to learn whether Facebook ads or a local radio campaign deserve more.

Commit to the proven channels for the year. Search, email and the website do not pay back in a week. Starting and stopping AdWords every month resets what you have learned.

Budget for creative. Good photography and clear copy raise the return on every channel. The cheapest way to improve a $2,000-a-month AdWords campaign is often a better landing page.

Review quarterly. Compare cost per lead or cost per sale by channel. Move 10% to 20% of the budget from the weakest to the strongest each quarter rather than rebuilding the plan.

• Spreading too thin. Twelve channels at $300 each produce nothing measurable. Four channels done properly beat it every time.
• Renewing by habit. The Yellow Pages contract, the chamber directory ad, the sponsorship that nobody has evaluated. Put every recurring item on the table once a year.
• Buying a deal-site campaign for cash flow. The discount plus the site's cut typically leaves you selling at a loss to customers who may not return.
• Ignoring the phone. Many small business leads still arrive by phone. If nobody tracks which campaign made it ring, half the budget is unmeasurable.
• Treating social media as free. The media is cheap; the time is not. Assign it to someone and count the hours.
• Cutting marketing first in a slow quarter. The businesses that held spend through 2009 and 2010 took share from those that did not.

Discover, plan, build, improve. Discovery is a review of where last year's money went, what each channel actually produced and what the website and tracking can currently tell us. Planning turns the benchmark into a number, the number into a channel split and the split into a quarterly calendar with targets. Build covers the practical foundations, the website or mobile update, Analytics and call tracking, the AdWords and email setup, the creative assets, so that spending has somewhere good to land. Improve is the quarterly review, where budget moves toward what is working.

Because brand, growth, web and technology sit in one team, the budget conversation is not a channel pitch. We will recommend fixing the site before buying ads when that is true, and cutting a channel we would otherwise manage when the numbers say so.

A representative engagement is on our performance work page. A regional business had grown a budget through yearly renewals and had no idea which parts produced customers. We rebuilt tracking, cut three legacy print and directory commitments, redirected the savings into search and email, fixed the mobile experience of the website and set a quarterly review. Within two quarters cost per lead had fallen and the owner could name the source of every new customer. The total spend did not change much. The allocation did.