Advertising is a necessary expense that companies must incur for future success. Usually, this expense includes the costs that relate to promotional activities. Companies use these costs to promote their products and services. Through this, they can attract more customers and create brand awareness for their products. On top of that, advertising is also crucial in obtaining a competitive advantage.
With advertising, companies can target a specific customer class. This way, they can get more control over who their customers are. Furthermore, it allows them to cater their goods to that particular class. In some industries, advertising may be crucial to attracting customers. If companies don’t spend more on their advertising budget in those industries, they will risk losing business.
More particularly, for small businesses, it is crucial to focus on advertising. However, these companies may not have the same resources as some other larger companies. Despite that, these companies must develop an advertising budget based on their needs. The average advertising budget for small businesses may differ from one industry to another. However, it is crucial to understand what this budget is first.
What is an Advertising Budget?
An advertising budget includes the plan of expenditure that companies must incur toward their advertising plan. This plan usually includes several factors. Usually, companies develop an advertising budget for both current and future needs. However, these budgets are short-term and cover a specific period. This budget relates to a company’s overall objectives when it comes to marketing.
The advertising budget falls under a sales budget. This sales budget then comes under a marketing budget. Therefore, a company’s marketing department is responsible for ensuring the proper execution of this budget. However, this budget must be realistic and cover its marketing and promotional objectives. If it fails to do so, the advertising budget is futile for the company.
Usually, an advertising budget differs from one company to another. As mentioned, every company has specific goals associated with what they want to achieve from advertisements. Therefore, they will create a budget that meets those needs and requirements. This budget also contains the details on the allocation of funds to specific operations within the advertising plan.
In most circumstances, small businesses will have a lower advertising budget compared to larger companies. However, some of those businesses may use a more aggressive approach toward it. Furthermore, the industry in which a company operates also plays a significant role in setting this budget. In some sectors, these budgets are significantly higher than in others.
Overall, an advertising budget includes details of how a company plans to use its resources for promotional activities. It relates to a company’s advertising plan, which includes details of how it uses advertising campaigns. For small businesses, the average advertising budget may differ based on various factors. However, these businesses are more likely to spend on promotions to capture a higher market share.
How Do Small Businesses Prepare an Advertising Budget?
The process of preparing an advertising budget for small businesses is similar to others. However, it may involve some additional work due to the size of the business. Usually, the advertising budget is a part of an overall budget that companies make. However, companies may also prepare these on their own, which rarely happens. Regardless of that, the steps involved in preparing an advertising budget for small businesses is as follows.
Research the industry
The first step required to prepare an advertising budget is to research the industry. Usually, companies use a percentage of their sales to establish an advertising budget. However, it may create some variation with the industry. Therefore, it is also crucial to set the budget according to the industrial average. For most B2B companies, the percentage of sales will be 2-5%, while for B2C business, it may be higher, around 5-10%.
Set goals
Once small businesses research their industry, they must set the goals they want to achieve through the advertising budget. Usually, these will include a series of questions that they must answer. For example, whether they want more customers, how to attract them, how many sales they expect, etc. Through these questions, small businesses can plan how to go ahead with the following processes.
Consider the costs
For most small businesses, the objective of an advertising budget is to maximize sales or attract the most customers. However, they may have limitations when considering the costs. Therefore, it is crucial to bear the costs in mind when setting goals. One of the primary objectives of the advertising budget is to establish the expenditure the company will spend on the advertising process. Therefore, this process is highly critical.
However, there is no specific limit when it comes to advertising costs. In most circumstances, these costs will differ according to the channels companies select to achieve their goals. For example, companies are more likely to pay less for social media advertisements than traditional media. However, if a company primarily operates in the digital market, the former option will get more focus.
Monitor costs
Once small companies make an advertising budget, the process isn’t over. A budget not only sets the limit for costs but also provides a benchmark against which to measure actual performance. Therefore, companies must use the advertising budget as a monitoring tool. During this process, if the management deems any changes to be necessary, it must adjust its budget accordingly.
What is the Average Advertising Budget for Small Businesses?
There is no set amount for how much the advertising budget should be for small businesses. Usually, several factors can impact how much those businesses must spend on their promotional activities. Despite that, several sources recommend what the average advertising budget for small businesses should be.
The US Small Business Administration recommends small businesses spend at least 7 – 8% of their gross revenues for marketing and advertising. However, this recommendation only applies to companies that make at most $5 million a year in sales. Similarly, it is for small businesses that only have a net profit margin between 10 – 12%. Usually, these rules apply to all small businesses.
In practice, most analysts believe the average advertising budget for small businesses to be 2 – 3% of revenues. These include both startups and small businesses. However, some numbers also suggest this average to be 1 – 10% of revenues. Usually, this percentage differs depending on how long a company has been operating in the market. The competition in the market also plays a role in how much it will be.
According to the Clutch and The Manifest polls, most small businesses in the US spend less than $10,000 on advertising. The second highest percentage is small businesses that only allocated between $10,000 – $50,000 for their advertising budgets. Apart from these, some companies may also spend more than $1 million on their promotional activities. However, these make up the smallest proportion.
Overall, the average advertising budget for small businesses differs significantly based on various factors. Similarly, the answer to how much it should be will vary based on who answers the questions. In most circumstances, the best option is to keep it 5 – 10% of the revenues. However, some small businesses may also operate in a highly competitive environment. For those, this budget may go up to 20% of the overall revenues.
Conclusion
An advertising budget defines the expenditures companies expect to incur on promotional activities in the future. For small businesses, advertising is highly crucial in achieving targets. However, there is no specific number on how much this budget should be. Usually, the average advertising budget for small businesses differs based on several factors, as mentioned above.
