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How much should a marketing budget be? There are two schools of thought on the best way to budget for marketing. You can either look at a percentage of target annual revenue or you can look at customer growth and the acquisition cost of each customer. 

What Percentage of Budget to use for Marketing?

For service businesses with a high volume of customers, say a restaurant, beauty salon, or house cleaning services, your marketing budget is easier to calculate if you use a percentage of your target annual revenue. 

What is your target annual revenue? This is the goal you have for the top line dollar mark you’re hoping to hit in a single fiscal or calendar year. Typical growth goals we see with our small business clients are usually 5-25% growth in sales. For newer businesses, the growth can look more like 50-100% growth year-over-year. For our clients, the goal is often to grow past their plateau. Businesses often hover year-over-year around the same revenue with some good years and some not-so-good years when they don’t have a marketing program set-up to help them scale brand growth. 

Figuring out a percentage of target revenue that fits with your business depends on the gross profit margins in your business and how aggressive your goal is. Your gross profit margin is determined by how much you earn from delivery of your service before fixed business expenses like rent and IT expenses. If your customers are looking for competitive pricing and most of your cost is in the labor of the delivery of those services along with some hard costs, your margins are likely smaller than others. Typically, these kinds of services companies may be managed business services, lawn services, and food service. Other services companies that provide a high-value, high-demand, or technical service with very low or no hard expenses may have more generous profit margins like law firms, design firms and home service companies. Software-as-a-Service or SaaS companies typically have the largest margins to play with.

Capital Marketing Expenses 

Not everything that is marketing related needs to be included in your monthly or annual marketing budget. The most obvious examples are one-time extraordinary expenses that are foundational and essential items every business needs. If your company goes through a major rebrand to align to a new business strategy, the brand strategy and brand execution work is something you only need to revisit every 5-10 years and shouldn’t be included in your growth budget but budgeted separately. In addition, website design and development could be budgeted as a one-time capital expense that your business has once every 3-5 years. Talk to your CPA about the best way to budget and recognize marketing capital expenses.

Fixed Expenses

Finally, we recommend that businesses expense website maintenance, hosting and domain registration and subscriptions to marketing and sales software as fixed operational expenses. In the modern age of business, a website and an integrated marketing and sales tool like HubSpot, is essential for your business. Recognizing that these costs are simply the cost of doing business, will position your marketing budget to focus on growth.

Now that we’ve examined how much your business should realistically budget towards brand growth via marketing efforts, you can examine what style of agency you’d like to work with and how much you can expect to spend.

Hourly versus Fixed Cost Models

The first consideration is if you’d like rather to pay per hour or have a monthly fixed cost relationship with an agency. Agencies that charge time and materials typically bill bi-weekly or monthly for the hours and expenses they’ve put into the work they’re providing you. They may or may not be able to give accurate estimates to how much time they’re going to dedicate, but usually keep the client’s budget ceiling in mind while they’re working. Agencies, depending on their expertise in an area, age and seniority of the staff working on the account, will likely charge anywhere from $150.00 to $350.00 an hour. 

Agencies that offer a fixed rate often offer work for a fixed monthly budget or a fixed price for single project with a clear scope of work and schedule. A fixed monthly rate is sometimes referred to as a retainer. Agencies will use this monthly budget to determine how many hours a month their staff can afford to work on the account or may have some fixed rate services that they will do monthly that have a very specific scope of work. Agencies vary on what their minimum monthly budget requirements are. Single service agencies that work with small business may start as low as $500 - $1,000/month. More sophisticated agencies with more robust offerings and strategy may require a minimum of $4,000 - $10,000/month. Agencies that only work with mid-size to enterprise size clients may have a minimum of $15,000/month or more. For projects, fixed rate pricing varies based on the complexity of the content, design, development, and effort.

Managed Services versus Agile Marketing Retainers

Digital marketing agencies may have routine services they provide at a fixed deliverable and fixed cost. For example, an SEO agency may charge $1000 for monthly SEO work and $2000 for four blogs a month added to the website. The upside to a model like this that it’s easy to predict what will done and what to budget. In addition, for the agency, the services never change so they’re typically offer these services at a larger scale, and they don’t require as much collaboration. The downside is that these services are often prescribed and delivered to a business in a cookie-cutter fashion typically and anything extra or different is out-of-scope. These engagements often require long-term contracts and don’t offer strategy, and it’s difficult to have a managed service agency provide reports with any meaningful connection to business outcomes. 

Agile Marketing Retainers, on the other hand, are designed to be highly collaborative and flexible, allowing for more creativity. In Agile Marketing Retainers, the agency and the client agree to a monthly budget. This monthly budget helps the marketing team at the agency plan campaigns that may involve a wide variety of deliverables including design, landing pages, social media posts, advertising, video, and marketing automation. The work is planned to fit the client’s monthly budget therefore clients with larger budgets have more work being completed faster. Clients with smaller budgets can get the same work completed but over a longer period. Agile Marketing Retainers work well for goal-oriented, growth-minded clients that understand their short-term and long-term goals when it comes to company initiatives and vision.

Percentage of Service Delivery versus Digital Advertising Costs

Digital marketing agencies may have routine services they provide at a fixed deliverable and fixed cost. For example, an SEO agency may charge $1000 for monthly SEO work and $2000 for four blogs a month added to the website. The upside to a model like this that it’s easy to predict what will done and what to budget. In addition, for the agency, the services never change so they’re typically offer these services at a larger scale, and they don’t require as much collaboration. The downside is that these services are often prescribed and delivered to a business in a cookie-cutter fashion typically and anything extra or different is out-of-scope. These engagements often require long-term contracts and don’t offer strategy, and it’s difficult to have a managed service agency provide reports with any meaningful connection to business outcomes. 

Agile Marketing Retainers, on the other hand, are designed to be highly collaborative and flexible, allowing for more creativity. In Agile Marketing Retainers, the agency and the client agree to a monthly budget. This monthly budget helps the marketing team at the agency plan campaigns that may involve a wide variety of deliverables including design, landing pages, social media posts, advertising, video, and marketing automation. The work is planned to fit the client’s monthly budget therefore clients with larger budgets have more work being completed faster. Clients with smaller budgets can get the same work completed but over a longer period. Agile Marketing Retainers work well for goal-oriented, growth-minded clients that understand their short-term and long-term goals when it comes to company initiatives and vision.