So you’re planning your budget and are asking the question: “How much should I spend on marketing?”
Well, you’re not going to like our answer, because it’s not a hard and fast number or just a percentage of your budget.
Like everything in marketing, the budget depends on your company, your goals, your industry, the current market, and your position in the market.
Though we can’t give you a clear-cut answer, we can give you some exercises to come up with that answer for yourself.
Before we dive into the different exercises, we want to give you a bit of advice:
View marketing as an investment and a necessary expense for consistent and reliable growth.
In marketing, you get the results you pay for. If you try to get by on a shoestring budget, you will get the growth, talent, and/or new business associated with a cheap marketing budget.
That said, pay for what you can afford. Unless you’re building a company on leveraged debt, we don’t want you spending more than your cash flow can handle.
This takes us into the first exercise.
Exercise 1: Define Your Financial Limits
Crunch your numbers and determine three levels for how much you can feasibly spend on marketing per month.
This represents the level of spending that you wouldn’t sweat paying each month. This is also what most business owners dedicate towards marketing when they don’t realize how important marketing is to the long-term growth of their company.
The Sweet Spot
This level represents an amount that is significant enough that you’re paying attention to what it’s going towards and the returns it’s making you. However, it’s not so much that it’ll keep you up at night.
This represents the level of spending that your cash flow can still support but will keep you up at night if you know it’s not going to good use.
We only recommend you pay for marketing at this level if you are working with trusted marketing talent and there is a high degree of certainty that you will see returns on the money spent.
Exercise 2: Determine Your Customer Acquisition Goals
Let’s be real, marketing is all about growth – meaning if you’re interested in marketing, then you’re interested in growing your company.
When planning your marketing budget, you need to know what outcomes you want to see.
This exercise will help you determine how many new customers or accounts you would like to gain after 1 year of your new marketing budget.
This will serve as the baseline. It represents the amount of new business you would get if you didn’t change anything.
The best way to get this value is by looking at how much business you got last year or by calculating the average number of new customers you got each year over the last 3-5 years.
This represents the number of new customers or accounts it would take to convince you that the new marketing budget was worth spending.
Note: For more thorough planning, you can come up with a favorable growth figure for each financial limit you set in the previous exercise.
Everyone’s Getting Bonuses
Jokes aside, this figure will represent the amount of new business it would take to reach a financial goal (e.g. to make a capital investment, to add another truck on the road, to hire another employee, etc.).
Exercise 3: Identify Your Revenue Goals
As you were considering your customer acquisition goals, you probably began to think about the dollar amount associated with each level. If you didn’t, then now is the time to do so!
Even if you’d prefer to look at growth by customer acquisition rather than revenue, it’s important to consider growth in terms of revenue for a couple reasons:
There is such a thing as an ideal customer, and a lot of it has to do with revenue or profitability.
Some customers will earn you a lot more revenue than others, so it helps to know how much money you want to bring in per customer – especially if there is a lot of variation in revenue among customers.
As mentioned earlier, marketing is all about growth. When you look at growth in terms of dollars, you might find that you can reach your revenue goals without having to earn it all through new customers.
Depending on the services your company offers, there might be a ton of potential revenue to be made in upselling additional services to your existing or even previous customers.
Exercise 4: Calculate Your Average Customer Lifetime Value (CLV)
Knowing your customer lifetime value (CLV) of your typical customer will help inform your decision on how much you’re willing to spend to get a new customer or account.
CLV is a measurement of how much revenue a customer generates during the average amount of time they spend with your company.
This number is important because it will tell you how much a customer is worth to your business over time.
This is a good number to know for businesses that offer maintenance services like landscape or pool maintenance because customers can stick around for several years – generating way more revenue than their first transaction or even first year of transactions.
Companies that offer one-and-done services such as floor installation or tree removal might not need to focus on this number too much unless they notice a trend of repeat business from customers.
Click here to learn more about CLV and how to calculate it.
Exercise 5: Consult with a Marketer
Yes, this is a shameless plug, but once you read this section, it’ll all make sense.
Completing the previous 4 exercises will help you get a good understanding of what you’re willing to pay for marketing, what results you want to see, and what those results will mean for the long-term growth of your company.
This is all information that will be helpful to have when consulting with a marketer.
A good and honest marketer will help you identify which marketing techniques will help you reach your growth goals based on how much you’re willing and/or able to spend.
A good and honest marketer will also help you determine whether your growth goals can be achieved from the amount you’re willing and/or able to spend.
Those decisions will be made based on their past experiences and what they’re hearing from other marketers.
Exercise 6: Create Your Marketing Budget!
After completing exercises 1-5, you should have a clear picture on what you can, what you should, and what you want to spend on marketing.
The last exercise is deciding what you WILL spend on marketing.
As we mentioned, it won’t be a clear cut decision, but if you did these exercises, then it should be a heavily informed decision – which is the best you can get in marketing!