A marketing expert explains how to decide
The question I hear from business owners the most is how much money they should be spending on marketing.
And honestly, a good many of them are surprised by my answer because it’s more than you probably expect.
But the fact is, marketing is vital to your success. No one will come to your restaurant if no one knows you’re there. And the more customers you want in those seats, the more marketing you have to do. That’s just the way it works.
Look at these statistics from the annual CMO Survey:
- Companies that grew 1 to 15 percent year over year spent an average of 16.5 percent of their revenue on marketing.
- Companies that grew 6 to 30 percent year over year spent an average of 22 percent of their revenue on marketing.
- Companies that grew 31 to 100 percent or more year over year spent an average of 50.2 percent of their revenue on marketing.
I’m not saying you too should be spending 50 percent of your annual revenue on marketing. That study was done on big companies with humongous budgets (companies like Twitter, Microsoft, and Oracle), but the same principles apply to smaller businesses.
Smaller companies, which are those with revenues below $25 million, spend an average of 11 percent on their marketing.
But here’s the thing: There is no magic, one-size-fits-all number. So let’s talk about what kind of marketing budget is right for your restaurant.
Here’s an example:
- ABC Restaurant had a gross revenue of $1 million in 2015
- They assign 15 percent of that to their marketing
- 15 percent of $1 million is $150,000
- This means ABC Restaurant’s marketing budget for 2016 is $150,000 (or $12,500 per month)
First of all, your marketing budget should be a percentage of your gross annual revenue, so the first step is to calculate your gross annual revenue. If you’re a new restaurant or your revenue fluctuates significantly, you should reassess quarterly.
Then it’s time to decide on your marketing budget. There are several factors to consider here, which I’ll break up into three categories. (Keep in mind that these are just starting points. You can always spend more or less, depending on what kind of results you get.)
1. You’re a brand-new restaurant
Startup businesses need do more marketing than anyone else, just to get off the ground. Yes, money will be tight, but if you don’t get customers in the door, that will never change.
Think of marketing as an investment, because that’s what it is. You’re investing in your own business.
Percentage: 25 to 35 percent
Considerations: This is the most delicate situation your restaurant will ever be in, so be diligent and do your research. If you have a lot of competition, you should be spending closer to 35 percent of your gross revenue on marketing. If you have very few competitors, 25percent may be enough.
Tip: Here’s something I suggest all businesses do: Rate your level of competition on a scale of 1 (no competition) to 10 (lots of competition). The higher your number, the more you need to spend on marketing.
Once you are bringing in regular revenue, you’ll fall into the next category.
2. Your restaurant is established and growing
When you are an established business, you can ease up on the gas, but don’t stop. Marketing is simply a part of any successful business venture.
Percentage: 12 to 18 percent
Considerations: You have two factors to think about here: your competition and your profit margin. The higher your profit margin, the more you can spend on your marketing. The average profit margin for small businesses is 10 to 12 percent, but for most restaurants, it’s less.
Tip: If you’re operating at a 2 percent profit margin and competition is light, start by setting your marketing budget at 12 percent, but if you have lots of competition, you’ll want to bump that up to 15 percent or more if you can.
Over time, you’ll see how your marketing budget affects your revenue, and can adjust it as you see fit. Many business owners are amazed at just how closely the two are related. Spend more on marketing, you’ll bring in more revenue, but keep in mind that the opposite is also true.
3. Your revenues are stagnating or in decline
When revenues are flat lining, you need to give your restaurant marketing a boost. (That’s probably not the only thing you need to do, but it’s definitely one of the things you need to do).
Percentage: 3 to 10 percent more than what you’re currently spending
Tip: When business owners need to cut expenses, the marketing budget is usually the first to go. This is always a mistake. You might need to forgo some luxuries you previously enjoyed, but we’re talking about your business.
Whatever you’re spending on your marketing needs to increase for six months. If you’re prospering again after that period, consider lowering your spend only if it’s not sustainable at that level. If you can keep it up, you’ll continue to grow.
But if you’re still declining after six months or are just barely leveling out, increase your budget again until you start seeing some results.
And remember, how you spend your marketing budget is just as important as how much you’re spending. If you’re not seeing the results you hoped for, don’t immediately change your budget. First, figure out which marketing channel is getting you the best return on investment, and spend more of your budget there!
Still not sure where you should start? Download a free marketing budget calculator here.