Most marketing budgets are set by one of three methods: last year's number, a percentage someone read about, or the figure an agency proposed. None of them start from your business. This guide shows a better way in five steps, using a worked example you can copy with your own figures. You'll need a calculator and about an hour.
Step 1: Work out what a new customer is worth
Answer first: use gross profit, not revenue, and include repeat business you can realistically expect over two years.
Revenue overstates what you can afford, because a sale with a thin margin can't support the same marketing cost as one with a wide margin. Here's the calculation:
- Average value of a first sale: $3,000
- Gross margin on that sale: 35%, so $1,050 of gross profit
- Share of customers who buy again within two years: 40%
- Typical gross profit on repeat business: $700
- Expected repeat profit per new customer: 40% × $700 = $280
- Total gross profit per new customer: $1,050 + $280 = $1,330
If you don't know your repeat rate, look at last year's customer list and count how many had bought before. A rough number is far better than none.
Step 2: Decide what you'll pay to win one
Answer first: choose a share of customer value you're comfortable spending on acquisition, usually somewhere between a fifth and a third while results are unproven.
In the example, at 25% of $1,330, the target cost to acquire a customer is about $330. That figure is your yardstick for every channel and every vendor.
Now turn it into a cost per enquiry. If your close rate on qualified enquiries is 30%, you need about 3.3 enquiries per customer, so you can afford roughly $100 per qualified enquiry. When an agency quotes a cost per lead, compare it with that number, and ask how they define "lead".
Step 3: Cap spend by capacity
Answer first: never budget to generate more customers than you can serve well. Extra enquiries you can't handle cost money and hurt reviews.
Suppose the example business can take on 20 new customers a month without hiring. At $330 each, the most it should spend on all marketing is about $6,600 a month. That ceiling includes agency fees, ad spend and marketing software.
Start below the ceiling, at around 60 to 70% of it, or about $4,000 to $4,600 a month here, and raise spend only when tracked results earn it.
Step 4: Split the budget between fees, media and tools
Answer first: decide how much goes to people, how much to advertising, and how much to software, so no single vendor quietly takes the whole amount.
There is no universal split, but a few principles help:
- Fees should buy work you can see. If fees are larger than ad spend, check that the work behind them is real: content, campaign management, website improvements.
- Ad spend should be paid from your own account where possible. You see exactly what was spent, and the history stays with you.
- Software should be counted. Call tracking, CRM, scheduling and review tools add up and often overlap.
An example split for the $4,400 starting budget:
| Item | Monthly | Notes |
|---|---|---|
| Agency or freelancer fees | $1,800 | Campaign management and reporting |
| Paid search ad spend | $2,100 | Billed directly to your card |
| Software and tracking | $250 | Call tracking, review requests |
| Reserve for tests | $250 | One small experiment a quarter |
| Total | $4,400 | About 67% of the $6,600 ceiling |
Step 5: Shape it to your season
Answer first: most Canadian businesses have clear busy and quiet months, and the budget should follow demand rather than run flat.
Canada's climate drives strong seasonality for many businesses: heating and snow services peak in the cold months, landscaping and exterior work in spring and summer, and many retail and hospitality firms around holidays and tourist seasons. Look at your monthly sales over the past two years and mark the peaks.
A simple approach is to weight spend toward the four to six weeks before your peak, when buyers are researching, and to cut back once your capacity is full. In quiet months, shift what remains toward slower-building work such as website improvements, search visibility and review collection, which pays off in the next peak.
Rules for when to change the budget
Answer first: set the rules in advance, so decisions come from data rather than nerves.
Example rules for the business above:
- Increase by 15% when tracked cost per customer stays under $330 for two consecutive months and capacity remains.
- Hold when cost per customer is between $330 and $400.
- Cut or restructure when cost per customer exceeds $400 for two months, after checking that tracking is correct.
- Pause growth spend when the schedule is full more than three weeks out.
Review these quarterly. Prices, margins and capacity change, and the rules should change with them.
Common budgeting mistakes
- Counting clicks instead of customers. A cheap click that never calls is not cheap.
- Leaving out the owner's time. If you spend five hours a week managing vendors, that has a cost too.
- Cutting in panic after one slow month. Look at two to three months before acting, unless something has clearly broken.
- Doubling spend on one good month. Same rule in reverse.
- No tracking. If you can't connect spend to enquiries, fix measurement before increasing the budget. Our agency audit checklist includes a tracking check.
A quick check on your current budget
If you already spend on marketing, run this test before changing anything. Add up last quarter's total marketing cost, fees and ads and tools included. Divide it by the number of new customers you can trace to marketing in the same quarter. Compare the result with the target from Step 2. If it's well under target, you may be under-spending; if it's well over, look for waste before adding money.
Putting it to work
Once you have a target cost per customer, everything else gets easier. Proposals can be compared against it, vendors can be held to it, and budget changes can be argued from evidence. If you'd like help building the numbers, our budget planning service does this with your own data, and our guide on choosing a marketing agency shows how to use the number in a hiring process. Fees for both are on the pricing page.
Frequently asked questions
What percentage of revenue should a small business spend on marketing?
Percentage rules are a rough starting point at best. They ignore margin, repeat business and capacity, which matter far more. Build the number from your own customer value and you will usually land on a figure you trust more than any rule.
Should ad spend and agency fees be in the same budget?
Yes. Both are part of what it costs to win a customer. Splitting them makes paid campaigns look cheaper than they are.
How long should I wait before judging a new budget?
For paid search and social, two to three months usually gives enough data. For search engine optimisation and content, allow longer, often six months or more, and track leading signs such as rankings and enquiries in the meantime.
What if I can't measure where customers come from?
Fix that first, even roughly. Ask every new customer how they found you, use separate phone numbers for major channels, and record the answer in one place. A budget without measurement is a guess.