How Much Should Your Marketing Budget Be?

Pearl Omotoyinbo February 12, 2019 0 Comments

No matter the size of your business, you have ONE aim: TO BE PROFITABLE.

You’re in business providing a particular product/service that serves the needs of a particular group of people in exchange for money. And your aim is to make more than you actually spend. That’s it. That’s the sum of any business.

Your #1 goal is to get your products and services in front of the right people, and to do that, you need to MARKET.

Marketing is the process of getting consumers interested in your company’s product or service.

In order to market your business properly, you’ll need 2 major things:

1. A Marketing Strategy
2. A Marketing Budget

Not having both of these is one of the biggest mistakes a business can make.

You need to know how to craft a marketing strategy for your business but in this article, we want to tackle your marketing budget.

So you know you need a marketing budget but the big question is “How much Should You Spend On Marketing?”

How much should you spend on marketing?

In order to calculate this, you first need to know what your financial goals are for the year.

I outline how we do this in this article.

Once you go through the step-by-step process, you should know:

1. Your estimated revenue for each month
2. How much you expect from each product or service
3. The number of customers you need for each of your products

So to answer the question: “How much should I spend on marketing”, you need to answer this question:

“How much should I spend to acquire a customer?”

I’m going to repeat a statement that changed the way I think about business and has been said by all the great marketers of our time:

“He or she who can afford to spend the most to acquire a new customer, wins.”

If you can afford to spend more to acquire a customer than your competitors, you will win every single time.

BUT you want to make sure that you are spending the most that you can afford to spend… no more and no less.

How Much Can You Afford To Spend To Acquire A Customer?

This is where a little math comes in.

But don’t worry. It’s nothing too hard.

Step 1: Calculate the Lifetime Value of a Customer

The lifetime value of a customer is simply how much a customer is worth to you over the period of time they do business with you.

Lifetime Value (LTV) = Total Revenue/Total No of customers (for a particular time period)

This time period should not be less than 90 days.

So you check how much you’ve made in the last 90 days (or more), how many customers (not transactions) in that same time period and then, you’ll have your LTV.

For example, you own a restaurant and in the last 90 days, your revenue is $100,000 and you’ve had 1,000 new customers within that 90 days, your LTV will be:

LTV = 100,000/1,000 = $100

That means each customer is worth $100 to you.

Note that if you run a business with higher value services such as Real Estate or Consulting,  you should calculate your LTV over a longer time period e.g. 12 months.

If you’re too early in business to have any of these figures or you don’t have this data for some reason, just estimate this figure.

Step 2: Calculate Return/Refund/ Cancellation Rates (RRC)

This may or may not be relevant to your business .

However, if you have a business policy to refund customers or you could have customers cancel on your services for any reason, you should make room for this.

If you have this rate, great. If you don’t, use 10% as a benchmark.

So, back to our example, 10% of $100 (our LTV) = $10

Step 3: Calculate Cost of Goods Sold (CGS)

How much does it take you to deliver your products and/or services to your customers? In other words, what is your direct cost?

For a product based business, this would include the actual cost to manufacture or purchase these goods, shipping, etc.

For a service based business, this would include direct costs to provide that service.

Back to our example, if the cost of goods sold is an estimated 15%,

Costs of Goods Sold: 15% of $100 = $15

Step 4: Calculate overhead costs (OC)

Every business has overhead costs that keep it running such as Utilities, Salaries, Software, etc.

You’ll need to know what percentage of your customers LTV accounts for overhead.

(It’s important to know and calculate these figures for your business.)

So, let’s estimate overhead costs to be about 25%

Overhead Costs: 25% of $100 = $25

Step 5: Calculate your profit (Pr)

This is the final step.

It’s important to estimate what you want your profit to be when trying to calculate how much you want to spend on marketing. If not, you’ll be spending all you make without making any profit.

So, let’s estimate our profit to be 20%

Profit = 20% of $100  = $20

Now, how much can we afford to spend on a customer?

Marketing Budget (MB) = LTV – (RRC + CGS + OC + Pr)

$100 – (10 + 15 + 25 + 20)

MB = $30

So, that means, you can spend up to $30 to acquire a customer.

Monthly Marketing Budget = 30 * No of projected customers for the month

So if that restaurant is looking for 100 new customers for the month

Their monthly marketing budget = 30 * 100 = $3000

And over the next 90 days, those customers will be worth $10,000 to the restaurant.

Got questions? Let us know in the comment section below.

AboutPearl Omotoyinbo

Pearl Omotoyinbo is a social media advertising consultant and marketing strategist. She serves as the Director of Promotions and Marketing for The iVEN Team and is keen to help small businesses leverage the power of the internet and social media to increase exposure to their brands and get their products and services in front of the right people. She believes that if businesses can apply the right Marketing Strategies, they can go from struggling to phenomenal. A self-acclaimed “social media junkie”, she has an avid love for social media and is constantly joining new social media platforms to figure out how they can be used for business. Her other loves include cake and ice cream. :)