“A man who stops advertising to save money is like a man who stops a clock to save time.” – Henry Ford
Have you, as a small business owner, ever asked yourself this important question: How much should my marketing budget be?
I think you should, and here’s why:
You Should Spend Money on Marketing
Unless your business is very unusual, it is not selling itself. You have to get your message to the people who need your product or service — one way or another. You may have a great word of mouth following, or perhaps you get great referrals from the networking you do, but, in a sense, those valuable leads are passive. The bad news is that if you are not going after your ideal client, you may be making less money as a result.
The good news is, the dollar amount you spend on your business will be low. But it will not be zero. Your marketing budget includes fees you spend on marketing groups, memberships in organizations, costs associated with your website, business cards, and more.
Take-home: There are very few, if any, businesses, that spend zero dollars on marketing.
How Much Are You Spending on Marketing?
It’s a great idea to know how much you’re spending on marketing. You can find out by setting up your accounting software so that your spending is calculated automatically when you categorize your expenditures, or you can create a spreadsheet and tally up your expenditures manually.
Once you’ve set up a process to capture your data, you’ll start to have a handle on how much you currently spend on marketing and where those dollars are going. It’s not a budget, exactly, because it’s based on the reality of what you currently spend, and not what you think you should be spending.
Take-home: Know how much you currently spend on marketing.
Is Your Marketing Dollar is Working For You?
Now that you know how much you spend, you can do the analysis to see whether your marketing dollar is generating leads that are turning into clients. This, of course, ups the complexity and the time you need to spend in order to figure it out, which may not be your favorite business task. Realistically, though, you are in business to make money, so now is a good a time as any to either set up a spreadsheet or get yet more software so that you can track where your leads are coming from, figure out which ones are converting, and then determine cost per acquisition (CPA).
Know Your Average Revenue Per Customer
CPA, in a nutshell, is how much money it costs you to acquire a new client. The money you spend acquiring clients is, in case it’s not totally clear, made up of your time, expertise, and marketing and sales dollars. As Social Media Explorer will tell you, a good starting point for calculating your CPA is to know your average revenue per customer. Here is the formula:
Average revenue per customer = Yearly revenue divided by customer count.
In other words, take your total yearly revenue and divide it by the number of customers you had (or purchases if your business is ecommerce) et voilà, you’ll know your average revenue per customer. One thing to consider: If your business, like Colibri Digital Marketing’s business, has a wide range of offerings, you might want to segment this number. For example, we have subscription-based clients and project-based clients so, for us, it makes sense to calculate those averages separately.
Take-home: Average revenue per client is a good number to know, and it gives you a foundation for taking the next step in your journey to marketing awesomeness.
Know Your Cost Per Acquisition (CPA)
CPA is harder to calculate, and, to calculate accurately, requires being able to track your customer’s journey. To get a rough idea, tally up how much you spent on sales and marketing, divide that by the number of customers you had for the year, and then subtract your average marketing cost per client from your average revenue per client.
I suggest that you quit reading this post right now and go calculate your numbers. Depending on how organized you are, it will take under an hour. Having that number on hand, rough as it is, will make you feel powerful! And, believe it or not, you will be one of the few small business owners in America who has even this level of insight into their own business finances.
Here are the steps:
- Calculate your average revenue per client
- Calculate your average marketing cost per client
- Subtract average marketing cost per client from average revenue per client
Now you have a rough idea of how much it costs you to acquire a client, which will help you answer the question: How muchshould my marketing budget be?
Take-home: Stay ahead of the curve — and your competition — by knowing your CPA.
Marketing Budget Common Cents
(See what I did there?)
If you don’t have the time or the ability to create a marketing budget based on data, you can start by looking at industry averages and then determining, after you have covered the fixed costs of your business (overhead), how much you have left over for marketing.
For an in-depth look at the numbers, read this fascinating article from Vital’s Alley Blog. Some companies reinvest as much as 53% of their revenues into their marketing and see growth of as much as a 111% as a result. Across the board, companies spend an average of 10% of their revenues on marketing. Are you?
This post was first published on colibridigitalmarketing.com. The original post can be read here.