How do you decide on your marketing budget?

For many Business Owners like you, the question of ‘how do you decide on your marketing budget’ is always a difficult one to pin down. Many Business Owners see it as a ‘cost’ or an /expense’, or just a necessary evil. And in my opinion that it is simply wrong. Marketing is a way to generate business – it’s the only way to ensure a constant flow of work and thus scale and grow your business.

However I have to hold my hands up. In the past I too, have seen it as a necessary cost, but we all know you really do need to look at it is an ‘investment’. As with any investment, the aim is that you put a certain amount of money in, but you get more money back eventually.

My biggest marketing investment was a TV ad campaign for my WhichBingo business (see below) that cost us around £130,000. At the time that was pretty scary, but it was an INVESTMENT, and it paid off many times over. We actually rang the campaign twice over an 18 month period.

But the more difficult question is ‘how do you determine how much to spend on your marketing?’

Apparently the US Small Business Administration recommends spending 7-8% of your gross revenue for marketing and advertising if you’re doing less than $5 million a year in sales and your net profit is around 10-12%. However I really don’t like it when a business simply decides it’s marketing budget based on a percentage of turnover. It’s far too simplistic – there are so many more aspects to bear in mind.

On this topic, and hence this post, I recently came across a really smart way to look at it (from Entrepreneurs Circle) that turns the thinking upside down.

How do you decide on your marketing budget?

Here’s a brief summary;

1) How much is your average customer worth? Calculated over the lifetime of say two to three years, or simply take your total annual revenue divided by total number of live customers.

2) Now think, how much would you be willing to pay to get one customer? If your average customer value is £5k, would you pay say £2,500 for a new customer? Maybe…

3) Now look at your marketing conversion rates How many leads, on average, does it take to create a new customer?

4) Take point 2 (the amount that you are willing to pay per customer) and divide it by point 3 (your conversion rate) you now have the maximum you can spend to generate a lead (your BPL ‘budget per lead’). This is the start point of determining your marketing budget.

To take this a step further, decide how many new customers you would like next month and then multiply it by your ‘budget per lead’ and then you have your monthly marketing budget. You can obviously do these calculations on a weekly, monthly or quarterly basis, depending on the nature of your business. And of course, as you fine tune your marketing and your conversion rates, you can re-do these calculations on a regular basis.

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