As part of small business week, we thought we’d do some research and see how small businesses – locally here in Chicago and around the country – are prioritizing marketing in 2017.
The short answer: it’s complicated.
While there’s clear evidence that most small businesses see marketing as their primary need, it isn’t being prioritized from a budgeting perspective.
Of the surveys and studies we found, a couple in particular shed some light on this phenomenon.
Expecting Growth in Uncertain Times
The 2017 Chicagoland Small Business Outlook Survey, conducted by the Chicagoland Chamber of Commerce and Loyola University’s Quinlan School of Business, provides a wide-ranging look at the health and trends within the local small business economy (with small businesses defined as having 500 or fewer employees). The businesses surveyed are largely smaller shops, with 86% having between 1-50 employees, 55% reporting $500,000 or less in annual revenue and 29% reporting between $500k and $5M annually.
Among other things, the survey found the following:
- While only 36% believe business is better than a year ago – and only 29% believe the Chicago economy will improve in 2017 – 59% expect more revenue and 77% plan to grow the business in the next year
- The dominant concern of small businesses owners is revenue growth (87%)
- The dominant need of small businesses owners is marketing (59%)
So, businesses didn’t see improvement over last year and they don’t expect the economy to improve, but they do expect their company to grow and they recognize a need for marketing to drive more revenue.
By my math, marketing appears to be the key ingredient behind this sunny outlook. So, everyone must be budgeting accordingly, right?
How Small Businesses Are Budgeting for Marketing
To get a pulse on this, let’s look at another study performed this year by Clutch, which examines the total marketing and advertising spending, plans and priorities of small businesses. Of the businesses surveyed by Clutch, 40% of respondents reported 10 or fewer employees, 27% had 11 to 50 employees and 25% had 51 to 250 employees.
The chart below shows how much these businesses budgeted in 2016.
As the chart shows, over half of business reported spending less than $100k on marketing last year, with over 40% spending less than $10k.
If you’re not sure what to make of these figures, here’s some context. According to the U.S. Small Business Administration (SBA), “Small businesses with revenues less than $5 million should allocate 7-8 percent of their revenues to marketing. This budget should be split between 1) brand development costs (which includes all the channels you use to promote your brand such as your website, blogs, sales collateral, etc.), and 2) the costs of promoting your business (campaigns, advertising, events, etc.).”
In other words, according to the SBA, a company with $3M in annual revenue should be budgeting between $210k - $240k per year for marketing.
Now, rather than relying on a percentage of annual revenue, we recommend using your customer’s lifetime value to create your budget so that you know how much you can spend on acquisition to hit your goals. In any case, these are modest budgets by any measure. With almost half of small businesses budgeting less than $10k per year on marketing, there’s clearly a gap between how much businesses say they need marketing and how much they’ve been willing or able to invest in it.
So how about this year? If businesses are expecting to grow revenue in 2017 despite uncertain economic conditions (and 59% of businesses surveyed by Clutch are expecting to grow), it stands to reason that they must be doubling down on marketing this year.
Let’s look at the data.
According to this survey, only 4% are planning to increase the marketing by more than 50% this year, and less than half (49%) are increasing the budget at all. Of these, 36% plan to increase by only 11-30%. (For the 41% of businesses budgeting less than $10k last year, that’s adding at most $3k to the annual budget.) Meanwhile, a surprising 46% of surveyed businesses are either maintaining or reducing the marketing budget this year.
Again, with overwhelming expectations for growth, a recognized need for marketing but no corresponding investment in marketing, this adds up to some serious cognitive dissonance.
What’s going on? The Clutch survey responses hint at two major forces at play here.
First, there’s a psychological component – specifically, a tendency among small business owners toward optimism. Much has been written about the necessity of optimism in business, as without an optimistic belief in success, businesses will almost certainly fail.
One respondent of the Clutch survey put it this way:
“I think that most people, especially small business owners, will be optimistic, since their business reflects them and the work they're putting in. If the question is answered with ‘I think we will shrink,’ then they are already thinking negatively, and accepting failure. That's going to be a self-fulfilling prophecy.”
Given this mindset, the seemingly unfounded anticipation that things will improve, even if they didn’t last year, starts to make more sense.
Perceived Digital Channel Costs
The second force has to do with the marketing and advertising channels that small businesses have generally gravitated to in recent years.
The Clutch survey shows us where respondents plan to increase digital marketing investments in 2017.
While some of these are widely seen as “expensive” channels (mobile app, VR/AR, some forms of video), many view channels like social media, email and content marketing as lower cost marketing investments – and they budget accordingly.
It’s true that these digital channels have a lower cost barrier to entry than many traditional channels like print, TV and radio, but as we’ve discussed before, there are no easy marketing channels – and if you want to compete, a marketing intern can’t be your entire marketing department.
For many businesses, online search presents the single most crowded and competitive channel possible – which means skyrocketing costs to compete with tactics like SEO and AdWords.
On the content marketing front, as Orbit Media’s Annual Survey of 1000+ Bloggers shows, content continues to get longer and more in-depth, more visual, more multi-media, more researched and better edited every year – which all requires a greater investment in time spent creating it to capture attention.
When it comes to social media, Facebook and other social advertising platforms are seeing an influx of money from giants ranging from McDonalds to IBM, a trend which – you guessed it – drives up the costs to compete. (And yes, for brands, Facebook is pay to play.)
The bottom line is that while digital marketing is still a very cost-effective way for small businesses to compete, for the clear majority of industries, the days of dominating online with a nickel-and-dime budget are over. That ship has sailed. But the good news is that the budgets required to leverage many digital and traditional marketing channels are not cost-prohibitive for most small businesses; they’re just more than the minimal budgets they may be used to.
The small businesses who turn their expectations for growth into reality now will largely be the ones who never forgot the old adage: it takes money to make money.
Looking for help setting a budget built to hit your revenue goals?