The quick answer: do not set next year’s marketing budget as a percentage of revenue. Start with the revenue you need, work backwards through your close rate, your lead to customer conversion and your cost per lead, and the budget falls out of the arithmetic. Percentage rules of thumb, the familiar 5 to 10 percent of revenue, are a sanity check at the end, never the starting point. Build the number in September or October, because by November you are budgeting for a year that has already started planning without you.
Most small business marketing budgets are set one of two ways. Either last year’s number plus a bit, or a percentage somebody read in an article. Both produce a figure that has no relationship to what the business is trying to achieve, which is why so many budgets feel simultaneously too large to justify and too small to work.
Here is the method we use with clients, and the arithmetic is simple enough to do on paper.
Start at the End
Begin with one number: the revenue you need marketing to produce next year. Not total company revenue. The portion that has to come from marketing, as opposed to referrals, repeat business, or the sales team’s own outbound.
That distinction matters more than anything else in this exercise. A business doing $2 million where $1.6 million is repeat and referral has a marketing target of $400,000, not $2 million, and budgeting against the larger number produces a figure four or five times too big.
So write down the marketing sourced revenue target. Everything else follows from it.
Work Backwards Through the Funnel
You need four numbers from your own business. Pull them from your CRM if you have one, from your books and your calendar if you do not. Estimates you believe are far better than benchmarks you borrowed.
| Number | Where to find it |
|---|---|
| Average revenue per customer | Total revenue divided by customers served. Use gross revenue per job or per contract. |
| Close rate | Of the qualified leads your team spoke to, what share bought. |
| Lead conversion rate | Of the people who contacted you, what share became qualified leads. |
| Cost per lead | What you spent on marketing last year divided by leads it produced. |
Now the chain. Take the revenue target and divide by average revenue per customer to get the customers you need. Divide that by your close rate to get the qualified leads you need. Divide that by your lead conversion rate to get the total inquiries you need. Multiply by cost per lead and you have your budget.
A worked example. Say you need $600,000 of marketing sourced revenue, your average customer is worth $6,000, you close 25 percent of qualified leads, 40 percent of inquiries become qualified, and your cost per lead has been running at $120.
- $600,000 divided by $6,000 means 100 customers.
- 100 divided by 0.25 means 400 qualified leads.
- 400 divided by 0.40 means 1,000 inquiries.
- 1,000 multiplied by $120 gives a budget of $120,000.
That is 20 percent of the revenue it is meant to produce. Whether that is acceptable depends entirely on your margin, which is the next step.
Check It Against Your Margin
A budget that produces the revenue and destroys the profit is not a good budget. Take your gross margin and apply it to the revenue target. In the example above, $600,000 at a 50 percent gross margin is $300,000 of gross profit against $120,000 of marketing spend. That works.
At a 20 percent margin the same plan produces $120,000 of gross profit against $120,000 of spend, which means you have worked all year to break even. At that point you have three options and only three: improve the funnel so the same revenue costs less to acquire, raise prices, or accept a smaller target.
This is the step people skip, and it is the one that turns a budget from a wish into a decision. It is also worth checking that the cost per lead you just used is real rather than inflated by waste: one Google Ads location setting quietly spends local budget on people who can never become customers, and it moves that number more than most. Our PPC Budget Calculator runs this arithmetic in both directions, including break even cost per acquisition and the most you can afford to pay per click before a plan stops working.
Split the Budget by Job, Not by Channel
Once you have a total, the temptation is to divide it by channel: so much for Google Ads, so much for SEO, so much for social. That produces arguments about which channel deserves more and no way to settle them.
Divide it by job instead.
Demand capture
Money spent reaching people who are already looking for what you sell. Paid search, local SEO, your Google Business Profile. This is the most predictable spend in the plan and it should be funded first, because it converts fastest and it tells you what the market is actually worth.
Demand creation
Money spent reaching people who are not looking yet. Paid social, content, email to a cold list. Slower, harder to attribute, and the reason your capture costs stop rising every year. Underfunding this is why some businesses find their cost per lead climbing steadily with no explanation.
Retention and expansion
Money spent on customers you already have. Email, loyalty, reactivation. Almost always the cheapest revenue in the plan and almost always the first thing cut, because it produces no impressive new customer count.
Infrastructure
The website, tracking, tooling, creative production. Not glamorous, and if it is broken every other line in the budget performs worse. A site that loses visitors on mobile makes every channel above it more expensive.
Most local businesses we work with end up somewhere near 50 percent capture, 25 percent creation, 15 percent retention and 10 percent infrastructure in a normal year. Shift it deliberately, not by default: a new business with no brand awareness needs more creation, an established one with a full pipeline needs more retention.
Decide What Would Make You Stop
Write down, now, what result would make you cut a line and what result would make you double it. Do it in September while you are thinking clearly, not in March when a channel has had two bad months and everyone is anxious.
For each major line, note the metric you will judge it on and the number that counts as working. Cost per qualified lead is usually the right one. Traffic is usually the wrong one.
Then set a review cadence, quarterly at minimum. A budget nobody revisits is a budget that spends the whole year funding whatever seemed reasonable last autumn.
The Sanity Check at the End
Now, and only now, compare your number against the rules of thumb. Businesses in growth mode commonly spend somewhere between 7 and 15 percent of revenue on marketing. Established businesses defending a position often sit lower, around 5 to 8 percent. Highly competitive categories with high customer value, legal and cosmetic medicine among them, routinely run higher.
If your calculated budget lands far outside the range for your category, that is a signal to check your inputs rather than to change the answer. Usually one of two things is wrong. Either the close rate or conversion rate you used is optimistic, which is extremely common when the numbers come from memory rather than a CRM, or the revenue target is not achievable through marketing alone and part of it needs to come from sales, pricing, or retention instead.
If you want a second opinion on where the funnel is weakest before committing the money, our Marketing Maturity Assessment scores six areas in about five minutes and tends to surface the constraint that is actually limiting growth. And if you want to sanity check what a given spend should return rather than what a target should cost, the Google Ads ROI Calculator runs the funnel forwards.
Frequently Asked Questions
What percentage of revenue should a small business spend on marketing?
Between 5 and 15 percent is the usual range, with growth stage businesses at the top of it and established businesses defending an existing position toward the bottom. That range is only useful as a check on a number you calculated from your own funnel. Starting from the percentage means you have set your budget from an average of businesses that are not yours, with different margins, different customer values and different competition.
When should I set next year’s marketing budget?
September or October. Building it then gives you time to test assumptions before the money is committed, to negotiate contracts and rates while you still have leverage, and to enter January already running rather than still deciding. Budgets built in December tend to be last year’s number with an adjustment, because there is no time left to do anything else.
How do I budget when I do not know my cost per lead?
Start with what you can measure and treat the first quarter as the measurement. If you have spent anything on marketing at all, total that spend and divide by the inquiries it produced, even roughly. If you have spent nothing, set a deliberately small test budget for one channel, run it for ninety days, and calculate the real number rather than planning a year around a guess. Fixing the tracking so this number exists is usually worth more than any single channel decision.
Should I cut marketing when revenue is down?
Cut the lines that are not producing and protect the ones that are, rather than applying an even reduction across everything. An across the board cut takes the same percentage from your best performing channel as your worst, which makes the recovery slower. This is far easier to do when you decided in advance what each line had to achieve, which is the argument for writing those thresholds down while you are building the budget.
Do This Part First
Before anything else, find your close rate and your cost per lead. Everything above depends on those two numbers, and most businesses either do not have them or are working from a figure somebody estimated years ago.
If they do not exist, that is the first thing to fix, and it is worth more than any budget decision you could make this year. You cannot plan a funnel you cannot see. When you are ready to build the plan properly, we are happy to walk through it with you, and it is a straight answer either way.