September 14, 2012 | 5-minute read (910 words)
If you’re wondering what your marketing budget should be, you’re not alone. This is the million dollar question: how can you be sure you’re spending the right amount of money on the right types of marketing? Many say it’s an art, not a science. Others argue that there is a clear equation that can help you to calculate exactly how much of your marketing dollars to place where: Simply figure out the equation, enter your variables, and voila.
In truth, it’s a little bit of both. With a little thought, a little math, a little data, and a little creativity, it is possible to have a good idea of how much to invest in your marketing for the highest possible return. In terms of "return," I have a strong finance view. Simply put, the role of marketing is to create leads and business opportunities. This is always the metric to return to.
This is called ROI marketing and it is key to not only determining your marketing budget, but to consistently building your company revenue. Your ROI always needs to link back to actual sales.
Return on Investment Marketing
ROI marketing is a measurement tool; it measures how much profit you make on a given marketing investment. To figure out the return on your investment, you need to identify a few figures to plug into your ROI formulas (As long as you are consistent, you can define your terms however you choose):
Contact Early Growth Financial Services for help calculating your marketing ROI—or for other financial support.
Cost of goods sold (COGS): The actual cost to produce your product (or provide your service)
Marketing investment: May be media cost, but could also be production cost.
Revenue: Again, this is variable. It could be your total revenue or your gross or net profit.
The Six Components of ROI Marketing
There are six key components of ROI marketing:
1. Understanding lifetime customer value - Once you know this, you can begin to figure out how much you should expect to spend on new customer acquisition. To calculate the lifetime value of a customer, you need to identify the following variables:
- Average annual revenue per customer
- Average gross profit margin (before any marketing expense)
- Cost of capital
- Average number of years per customer
2. Estimating target acquisition cost per customer cost - Look at your company data. Take the total cost of your marketing budget and divide by the number of customers you won with this investment. This is your historic acquisition price.
3. Determining your marketing budget - Take your target revenue and divide by the average customer revenue. Then multiply this by the target acquisition price. Once you have your ROI goal and overall annual revenue goal, calculate your targeted marketing spend.
4. Predicting which tactic will help you to realize your customer acquisition goals - Use the by-product of your calculations to make some informed decisions as to which marketing strategy will be most successful in helping you to achieve your goals.
5. Setting your marketing ROI goal - Once you have established your ROI threshold, stick to it. If a marketing initiative isn’t hitting the threshold, cut it. Put your marketing dollars where you know they will have a greater impact.
6. Monitoring your ROI - Measure, measure, and measure again. Use your results to continuously improve your campaigns and maximize your marketing dollars.
ROI Marketing: More Than a Measurement
How you choose to track your marketing spend and calculate your ROI marketing can differ from company to company. The important thing is that you make the effort to add some rigor to your marketing activities. Even if the calculations aren’t exact, they can still show you clear trends of which marketing activities are getting real results—and which aren’t. And again, results means actual sales.
With a small business, you can’t afford to waste your funds on marketing with low ROI. But calculating the best marketing spend isn’t just about managing your costs; it’s also about making sure that you are using your limited money to get the best ROI. You don’t want to miss any opportunities to help your business to acquire customers and earn revenue.
Ultimately, ROI marketing is more than a measure, it’s also a philosophy. But you can’t implement ROI marketing without making a larger organizational change. This is no small task.
Some early-stage startups with limited funding might view marketing as a low priority, an unnecessary “cost.” In fact, marketing is not just an outlay of capital; it’s an investment back into your company—not a drain on it. ROI marketing helps you to justify your investments, supporting the old adage that you need money to make money: to produce revenue, you need to invest—and reinvest—in marketing your product/service.
How do you determine your marketing budget? Tell us about it in comments below or contact Early Growth Financial Services for help with budgeting.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial and accounting services to companies at every stage of the development process. He's a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.