When you own a business, it can seem mystifying to figure out how much you should be spending on marketing and to know if that is money well spent. Fortunately, there are standard practices and equations to demystify and provide tools to remove the guesswork and give you the confidence to market your work. We’re going to jump right into what these tools are below. If you are interested in where to market, give this article on the areas of marketing a read.
Where are you in your business?
How much you spend depends on how well known your business is.
For new (1-5 years) or unknown businesses: Your marketing costs should be 12 – 20% of your gross revenue.
For established businesses (people already know who you are): Your marketing costs should be 6 – 12% of your gross revenue.
What is your Gross Revenue?
Gross revenue is the total revenue before any money is taken out for taxes, expenses or salaries. The big number of everything you sold and received money for with your business.
To figure out how much to spend annually on marketing, take your gross (we’re going to use nice round numbers for simplicity) which we’ll say is $100,000. Choose the appropriate percentage, let’s use 15%. Subtract the % from the gross and you have your projected marketing costs.
Gross Revenue / % = Marketing Costs
$100,000 x .15 = $15,000
Your marketing costs will be your marketing budget for the year. It includes all advertising, PR, social media, giveaways, your website,
How much should be spent on each acquisition (new client/customer)?
How do you know if you’re not spending wisely? There is a trend for businesses to overspend on their acquisition costs. This is fine if your goal is to prove that you have fast customer growth in order to go public (currently there are less than 4,000 public traded companies in the US and that number has dropped 50% in the last 20 years, so not a realistic goal for most of us). For the majority of businesses, you want to aim for, at the very minimum a $1 return for every $1 spent. We’ll discuss this more in a bit.
How do you figure out your acquisition costs? Your marketing costs divided by clients generated from said costs equal your COA (cost-of-acquisition). We’ll continue to use our $15,000 marketing costs as an example. Let’s say for ease, that we received 15 clients from these efforts over the year. You’ll divide the marketing costs by the clients and get your COA.
Marketing Costs / Clients Generated = COA
$15,000/15 = $1000
Now you know that each client had cost you $1000 to acquire.
How do you know if you’re spending too much or too little on acquisition?
The most important marketing metric is ROI. ROI = Return On Investment. At the most basic, “good ROI” is what was mentioned above, that for every dollar you spend, you get $1 back.
Back to our acquisition costs, and our knowing that it costs us $1000 to acquire a new client. You would then want to make sure that each of these clients paid you $1000 over the year to break even on marketing costs, and achieve “good ROI”. But ideally, you would want 2x the COA, making it a goal of $2000 per client at a minimum.
The ROI metric makes sure that we know in numbers, that we are reaching our goals of at the very least 1x (would give you back what you put in, with 0 ROI) or 2x the COA (ROI = 100%).
We calculate the ROI by taking the amount of sales growth, subtracting the marketing costs and then dividing that number by the marketing costs. We’ll use our $15,000 marketing costs and say we made 2x the COA to show what this looks like. Your final number will be multiplied by 100 to create the percentage.
(Sales Growth – Marketing Costs) / Marketing Costs = ROI
($30,000 – $15,000) / $15,000 = 1
1x 100 = 100% ROI
What does Great ROI look like?
If you are aiming for 1x or 2x the COA, you’re not losing money. However, the goal with a business is usually to do more than break even. Ideally, you would aim higher. An example of great ROI would be if you spent $100 on a Facebook ad and had a sales growth of $900 on it. That would be a 900% ROA and fantastic!
As we discussed in the Marketing Checklist article, you do need to be seen at a minimum of 7 times by a potential customer before they take action. So it’s a good practice to spread around your marketing efforts across multiple areas to maximize visibility. In doing this, some of your ROI’s will higher than others. Aim to keep them balanced so you are at the very least getting a 0 ROI if starting out and gaining exposure.
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