How to Calculate the Right Advertising Budget for Small Business

Whether you are just starting a new small business or looking to expand your existing one, advertising plays a crucial role in reaching your target audience and driving growth.
However, as a small business owner, you might face budget constraints, making it essential to calculate the right advertising budget to maximize the return on investment (ROI).
In this guide, we will walk you through the steps to determine the optimal advertising budget for your small business to achieve the best possible results.

Assess Your Business Goals

Before diving into setting an advertising budget, you need to define your business objectives. Are you aiming to increase brand awareness, generate more leads, drive sales, or promote a new product or service? Understanding your goals will help you align your advertising efforts with the desired outcomes and allocate the budget accordingly.

Analyze Your Industry and Competition

Conduct a thorough analysis of your industry and competitors. Research how other successful small businesses in your niche allocate their advertising budgets. This will provide you with insights into the industry benchmarks and help you understand the level of investment required to stay competitive.

To check your competitors’ ads

Determine Your Target Audience

Identifying your target audience is crucial for crafting effective advertising campaigns. Understand their demographics, preferences, behaviors, and pain points. This knowledge will enable you to choose the right advertising channels that resonate with your potential customers, ensuring you get the most out of your budget.

Calculate Customer Lifetime Value (CLV)

Customer Lifetime Value (CLV) refers to the total revenue a customer generates for your business over their entire relationship with you. Calculating CLV will help you understand the long-term value of acquiring a new customer. This insight is vital for deciding how much you can afford to spend on customer acquisition through advertising.

Set a Budget Based on ROI

Return on Investment (ROI) should be at the core of your advertising budget decision-making process. Calculate the potential ROI for each advertising channel and campaign type you plan to use. Focus your budget on the channels and campaigns that have the highest likelihood of delivering a positive return.

Monitor and Adjust Regularly

Setting an advertising budget is not a one-time task. Markets, consumer behavior, and business circumstances change over time. Regularly monitor your advertising performance and adapt your budget allocation accordingly. Stay agile to respond to market trends and capitalize on new opportunities.

How to Calculate Advertising Budget

The U.S. Small Business Administration (SBA) suggests allocating at least 7% to 8% of gross revenues to marketing, with 50% of that budget directed toward digital marketing.

For example:

  • Gross Revenue: $100,000
  • Advertising Budget (%7): $7,000
  • Digital Advertising Budget (%50): $3,500

How to Allocate Your Digital Advertising Budget

When planning a digital advertising campaign, the allocation of your budget is a critical decision that can significantly impact the success of your marketing efforts. As a small business, you may have limited financial resources, making it essential to allocate your budget strategically to achieve the best possible return on investment (ROI).

Clearly define your advertising objectives, whether it’s increasing website traffic, lead generation, sales, or brand awareness. Your goals will shape how you allocate your budget across different platforms.

Your product/service type is one of the main criteria in determining the channel you will advertise. If you offer a service (such as a locksmith service) that users request only in certain periods, search ads will be suitable for you instead of social media channels.

Consider Past Performance: If you’ve run previous digital advertising campaigns, analyze the performance data. Allocate more budget to platforms or campaigns that have historically yielded positive results.

Testing and Experimentation: Allocate a portion of your budget to test different platforms and campaign strategies. Monitor the results and identify which ones deliver the highest ROI before scaling up.

For a firm with a budget of $3000, three different alternative budget allocations across Google, Instagram, Facebook, and TikTok:

Alternative 1:

  • Google Ads: $1200 (40% of the budget)
  • Instagram: $800 (26.67% of the budget)
  • Facebook: $600 (20% of the budget)
  • TikTok: $400 (13.33% of the budget)

Alternative 2:

  • Google Ads: $1000 (33.33% of the budget)
  • Instagram: $1000 (33.33% of the budget)
  • Facebook: $600 (20% of the budget)
  • TikTok: $400 (13.33% of the budget)

Alternative 3:

  • Google Ads: $800 (26.67% of the budget)
  • Instagram: $700 (23.33% of the budget)
  • Facebook: $800 (26.67% of the budget)
  • TikTok: $700 (23.33% of the budget)

Remember, the most important thing is to test. Therefore, starting with the smallest budgets to try the platform that suits you best should be the main strategy.

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