Most established businesses spend somewhere between 5 and 10 percent of revenue on marketing, and businesses pushing for growth spend 10 to 20 percent. That rule is a useful gut check, but it works backwards. The budget worth setting comes from working forwards: what a customer is worth to you, how many you want, and how much of each sale's profit you will put back into winning the next one.
There are two ways to land on a marketing budget. One is quick and rough. The other takes five minutes and gives you a number you can actually stand behind.
The quick rule, and why it falls short
The percentage rule says spend a slice of your revenue on marketing. Around 5 to 10 percent if you are established and steady, 10 to 20 percent if you are chasing growth.
It is fine for a sanity check. The problem is that it looks backwards at last year's revenue and tells you nothing about whether the spend will pay off. Two businesses with the same revenue can have very different margins, close rates and customer values, so the same percentage is sensible for one and reckless for the other.
The calculation that actually works
Instead of guessing a percentage, work backwards from what a customer is worth. You need five numbers, and you already know most of them.
- Average sale value. What a typical job, order or client is worth.
- Gross margin. After your costs, the share you keep as profit.
- Close rate. How many genuine enquiries turn into paying customers.
- Reinvestment appetite. The share of each sale's profit you put back into marketing, usually 20 to 40 percent.
- Target. How many new customers you want in a month.
From there the maths is short. Multiply your sale value by your margin to get the profit in one sale. Take the share of that you are willing to reinvest, and you have the most you can afford to spend to win one customer. Multiply that by how many customers you want, and you have your monthly budget. Divide by thirty and you have your daily spend.
A worked example
Say you are an electrician. An average job is worth $2,000, and after materials and labour you keep half as profit, so $1,000. You decide to reinvest 30 percent of that to win the next job, which is $300. You want ten more jobs a month.
Ten jobs at $300 each is a $3,000 monthly budget, or about $100 a day. If the ads perform, every job costs you $300 to win and returns $1,000 in profit. That is the number to start with, and it came from your business, not a percentage someone guessed.
Three limits worth knowing
Your break-even point is the full profit in one sale. Spend up to that and you cover your costs on the first job, so your target should sit comfortably under it. Anything you spend below break-even is profit.
If customers come back, use their lifetime value, not a single sale. Healthy businesses spend up to a third of what a customer is worth over time to acquire them.
And watch your payback period. If it takes more than a year of margin to earn back what you spent winning a customer, growth is running ahead of your cash.
Where people go wrong
The common mistake is setting the budget first and hoping. Start too small and the platforms never gather enough data to find the right people. Start big with no landing page and no tracking, and you are paying to send strangers to a dead end.
Decide what a customer is worth, decide how many you can handle, and let the budget fall out of the maths. If the number it gives you is more than you can float, the lever to pull is your close rate, because a better close rate lowers the cost of every customer at the same spend.
We built a free calculator that runs this exact maths in about a minute. You will find it on our pricing page, in the section on ad spend.
