This is a question many want to answer because they all know to make money, one must spend money. Unless you’re Kim Kardashian who can make money by doing nothing sometimes.
But how do you find out what’s a good budget? Or how much of an impact can marketing have on your bottom-line?
The answer is: It depends.
If you know your numbers, you can bring it down to a science.
I’m sure you didn’t expect to get a “it depends” answer, so I’ll try to simplify it. According to CMOSurvey.com, which surveys and researches for this kind of information, a typical business should look to spend anywhere between 10-20% of their annual revenue on marketing.
Now, that percentage number provided by CMOSurvey is from 2014. We’re now in 2017. So, it is safe to assume that the number has gone up. Let’s be conservative and say anywhere between 15-25%.
In 2017, a typical business should spend anywhere between 15-25% of their annual revenue on marketing.
If the number seems staggering to you, then it’s time for you to assess the situation. Look around your industry, your competitors and see how they are marketing themselves. What happens when a consumer has so much choice? You work harder to stand out and get their business.
And that’s why these budgets are growing.
If you want to be a little calculated with how much you’d like to allocate per month for marketing, you’re going to have to roll up your sleeves and do some work.
Don’t worry, we’re still going to try and keep this insanely simple but know that there are other complicated or advanced ways too:
- Find out how long an average customer stays a customer
- Find out how much revenue he contributed to your bottomline in the past 3 or 5 years. If you can’t go back that far, it’s fine – start with one year at the very least.
Let’s go into some more detail.
Life of a customer with you
All you have to do is do some math on most of your customers, see the gap between their purchases and see how far the gap spans. Say on average, your customers stay with you for 2 years.
Revenue a customer brings
Now, on average, how much revenue this customer brings you in 2 years?
The table on the right shows you an example on how you can bring this data into a table format and start trying to identify a pattern so you will know something like:
On average, a customer spends $2912.45 with us in a 2 year period.
This customer suddenly looks good to you. Because now that you see these numbers, it changes everything.
If a customer stays with you that long, and spends that much, you can afford to spend a little more on marketing to bring in more customers. Don’t you think?
Most people don’t think about that. If we suggest to spend $3,000 per month, they think:
Hmm, if that budget brings me 50 customers and they each book my $133.94 facial peel service, that’s $6697 in revenue (sales). Hmm, that sounds like a decent RoI of about 123%. But I don’t want to spend $3,000… maybe I should spend $300.
But as you can see, it’s not the right thinking. Applying the knowledge you just received, each of these 50 customers can potentially bring you $145,622.50 in revenue in the next two years! (50 customers*2912.45 total order value from table)
Wouldn’t that be a good thing?
Here’s a formula you can use to get to that LTV (lifetime value) of a customer to make it simple for yourself:
You can stop here and go the simple route and say “I’d like to spend 15% (or any number based on your newfound knowledge) of my annual revenue on marketing”. And you’d have a good start.
But I’d like to close this up with an example that you may probably have seen.
A gym that offers “1 month free membership”. If a gym member pays $20 per month, and their average retention period is two years – that formula would look like: $20 (monthly fee) x 12 (number of repeat transactions per year) x 3 (number of years) = $720 LTV.
So even if the gym gives away a whole year of free membership, they know they can see profits starting year 2. A lot of ways to slice and dice this depending on how long the business has been around, or how soon you want to start seeing profits but you get the gist.
If this is something you want to do, but would like some assistance, get in touch with us.