How Much Should you Really Be Spending on a Marketing Budget?

How much should you spend on marketing? This is a question that many business owners struggle with. The answer is, there’s no one-size-fits-all answer to this question! As difficult as it can be to determine how much money to allocate to marketing, especially when you are not sure what will work and what will not; careful planning, research, and  the right execution will aid in creating a budget that is sure to help you achieve your marketing goals. In our previous blog posting, “What to Look for When Hiring a Marketing Agency“, we mentioned six things that you should examine when choosing your right fit. Cost effectiveness was included in that list.  In this blog post, we will discuss some tips for budgeting your marketing expenses. We will also provide some information on how to track your return on investment so that you can make sure that you are getting the most bang for your buck!

For starters, let’s start out with what marketing is. Marketing refers to any action(s) that a business takes to gain the attention of an audience to encourage them to try their product or service, through high quality messaging. In the past, when someone thought of marketing they thought of commercials on television, direct mail, phone calls, and billboards. And although those are forms of marketing, they are now referred to as ‘traditional marketing’, because the medium has grown so much as the digital world has expanded. Now marketing encompasses internet marketing, search engine optimization (SEO), social media marketing, print marketing, and video marketing, to name a few.

With there being so many different marketing techniques, it’s easy to feel overwhelmed. Knowing how much you should allocate for these different marketing strategies can become even more daunting. Typically a company budgets between 7% and 10% of their revenue for marketing. But how do you know whether you budget 7%, 10%, or somewhere in the middle? Or which marketing channels you should invest in? The honest answer is trial and error. Figuring out which channels will best suit your business requires tracking leads and where they come from. That in return will show you which channels you should invest more in. Determining your budget requires answering a few questions.

What is your company’s current yearly revenue, and how many customers are you wanting to reach?

Auditor or internal revenue service staff, Business women checking annual financial statements

Creating your marketing budget should always begin analyzing previous revenue. Setting your goals for the future should reflect what you’ve done in the past, and if it is even attainable. Ever heard of the saying, “if you don’t know your history you don’t know your future?” Consider that to be true when it comes to setting your budget as well.

What is your new customer goal? How much do you need to spend to bring in said number? These are two questions that should live in the front of your mind when creating your marketing budget. Analyzing your revenue should be followed with having a solid strategy, with well defined goals. These goals should be specific, measurable, attainable, relevant, and timely (according to Business Chat). Having specific goals that can be  reached and measured will help you track and determine how effective they were in the long run, helping you weed out what channels are and are not helpful to your business.

Easy enough, let’s continue!

What is your Return on Investment (ROI)?

The simplest way to understand Return on Investment is to start with benchmarks and estimate from there.

  • 10:1 (You make $10 for every $1 you put into marketing) – Exceptional Return that most businesses get when they are trying to sustain the current business they have. 
  • 5:1 (You make $5 for every $1 you put into marketing) – Good for most businesses that are in the growth stage. 
  • 3:1 (You make $3 for every $1 you put into marketing) – Not sustainable for most businesses. 

Another way to look at those benchmarks would be in percentage of current or projected revenue. 

  • 10% of revenue = 10:1 return on investment
  • 20% of revenue = 5:1 return on investment
  • 33% of revenue = 3:1 return on investment

You pick which benchmark is applicable to your business while considering things like overhead, payroll, profit, etc. 

Be sure to plan for a 5:1 ratio if you’re looking to tap into a new audience. 10:1 would be good if you’re looking to capitalize on clients already in your pipeline. It’s always cheaper to get more revenue from current clients than it is to go out and prospect for new business. 

What is the Customer Lifetime Value?

Business man handshaking with customer

After figuring out how much revenue you need and the return you’re looking for, you have to calculate how many clients or customers you need for that year.

Let’s say you have the following variables:

  • Revenue goal: $200,000
  • Return on investment: 5:1 (20% of revenue)

Calculating the average Customer Lifetime Value (CLV) will tell you exactly how many clients you need to make your revenue goal.

Simply put, the CLV is how much money you get, on average, from each client per year. If that number is $10,000, and your goal is to get $200,000 in revenue you’d need approximately 20 new clients.

If that number is $1,000, you would need 200 clients to get to your goal. 

This number is extremely important to know because it tells you exactly how much you’re able to spend to acquire a new customer, which is called the Cost Per Acquisition (CPA)

What is your Cost per Acquisition (CPA)?

Your cost per acquisition is simply the highest amount you can pay to acquire a new customer for your business. 

If you’re business has the following variables:

  • Revenue goal: $200,000 
  • Return on investment: 5:1 (20% of revenue)
  • Marketing Budget: 40,000 (Calculated by Revenue goal x ROI Percentage)
  • Customer Lifetime Value: $10,000
  • Need 20 clients to get to revenue goal

Your cost per acquisition would be $2,000 (CLV x ROI). If you multiply that by the amount of clients you need, it would be equal to your marketing budget. 

It’s a lot of numbers, but it’s all connected and it will give you insight into exactly what kind of marketing you should be doing to get new clients.

How Many Leads to Gain One Client?

Manager woman leading a brainstorming meeting.
Manager woman leading a brainstorming meeting.

So we have the cost per acquisition. How does this number tell you what you can and can’t do from a marketing perspective? 

It tells you exactly how much you can spend to acquire a customer, but you need to know how much you can spend to get a lead.

Your website getting 1,000 prospects per month

Let’s look at your website. For the 1,000 prospects that went to your website contact us page, only 10 filled out the contact form and became leads.

The 10 people who fill out your contact form

Out of the 10 people who filled out your contact form (leads), only one converted into a paying customer.

Effectively your conversion rate from leads to customers is 10%.

Simply dividing the $2,000 (the most you can spend to acquire a customer) by 10 leads would give you $200, which is your max cost per lead. 

Your cost per lead

This means you can spend up to $200 per lead for your business since one in 10 leads convert to a client.

Total Marketing Budget and Lead for the Year

The management is checking the accuracy of the company budget information.

So we’ve done all those calculations, so you may be asking how you can use this to make sure you’re on the right track to reach your business goals.

Are you overpaying for social media or do you need to increase conversion for your website?

The points below give you more insight into how many leads you need for the year to ensure you’re getting a good return on investment.

  • As determined in the sections above, your marketing budget is $40,000.
  • Your cost per lead is $200.
  • Leads needed to get 20 customers ($200/$40,000) = 200 leads.

This means you would need 200 leads to convert 20 customers and reach your goal. 

Of course all of these numbers are made up for the sake of this blog post, but it really is that simple! Allocating a certain amount of money for marketing ensures that you’ll reach your target audience and gain new customers. The right marketing agency will do the math for you (: and will come up with the right strategy to help you attract and maintain clients.

Christian Payton

Christian Payton

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