Need more sales and not sure where to start? Start from the ground up by first reviewing and allocating an appropriate marketing budget based on customers’ ROI. If you don’t know your customers’ ROI at this point, where do you start?
No stress, we’ve got you covered...
Learn how you can calculate it in the future and what budget you can use right now to get going.
In this short guide, we will shed some light on how much most businesses allocate to their online marketing budget and how you can calculate yours based on how much you would like to grow your business.
To come up with this figure, it is vital to first understand the value of each customer, and how much you are willing to spend to acquire each new customer.
Understand the value of each customer
Before we start planning your marketing budget, it is a good idea first to understand how much each customer is worth to you and how much you are willing to pay to acquire that new customer.
Let’s jump in...
Understand the value of each customer
In marketing, customer lifetime value (CLV or often CLTV), lifetime customer value (LCV), or lifetime value (LTV) is a prediction of the net profit attributed to the entire future relationship with a customer. Understanding your customers' lifetime value will play a part in coming up with a monthly marketing budget that will be profitable for your business.
Finding your lifetime customer value
To find your customers’ lifetime value, you will first need to crunch some numbers. If you are using accounting software like Xero or Quickbooks, you should be able to find your customers' total sales history easily in here.
Write down on a piece of paper the total revenue each customer has spent with you minus any attributable costs to servicing that customer. Repeat this process with all your clients and make sure you include the full duration each client remained a customer. Now calculate the average each client spent with you.
You should now have an estimated dollar value of the average profit each customer brings in to your business over a defined period of time.
For example, if your estimate CLV is $1,000 and you have to spend $700 on marketing to acquire that new customer, your profit would be $300- you will need to consider whether this is profitable enough for your business to grow at a fast enough pace.
Why is this important you ask?
Because when planning your marketing budget you need to take into account your business's profitability and making sure the marketing budget you choose will increase your bottom line.
Good tip - If you understand the value of your customers you can also:
- Decide which customers to invest in
- Recognise new customers and markets to target
- Agree which product and service lines should be offered and promoted
- Change pricing to extract more value
- Identify the unprofitable customers you should “fire”
- Learn where to cut costs and investments that are not generating growth
Understanding your Estimate CPA
What is a CPA (Cost Per Acquisition)?
Cost per acquisition (CPA) per sale, is the calculation of how much it costs to acquire each new customer through advertising. You can also calculate CPA per click or per enquiry. But in this example the main CPA metric we are looking for is CPA per Sale.
Understanding how much each CPA will cost you will help you to determine how much you should spend on marketing to reach your business’ marketing goals.
Now let’s put this into practice.
Calculating your average CPA
If each Google Paid Ad click costs you $1 and it takes you 20 clicks to get an enquiry, your CPA per enquiry will be $20. If you know that for every three enquiries you get one sale, your CPA per Sale will be $60.
What's great about knowing your CPA per sale and having a marketing plan that has a central focus on reaching this target metric? Well, the answer is you now have a dollar figure for how much it should take to scale your business at volume.
If you want 50 leads for the month and you know your CPA is $60 per sale, this would mean the amount you should be aiming to spend on monthly marketing budget should be $3,000 to gain 50 enquiries. (Please note the CPA metric is an average, so you might get more or fewer enquiries depending on your marketing reach and other outside factors).
I'm sure you would agree that this metric is fundamental for optimising your online marketing budget and helping you achieve a calculated ROI.
Does CPA Vary across marketing channels? You betcha.
Allocating Marketing Budgets Across Channels
Marketing Channels in which businesses are currently increasing budget
Reports from Forrester Research and eMarketer show an increase in digital channel investment across multiple businesses.
The report shows that a lot of businesses are now increasing their marketing budgets in social media, branding and content marketing.
Top 3 Marketing channels businesses should start with
The previous example showed what channels people are increasing, but not what channels people invest the most in.
If you are not sure which online marketing platform to invest in first, we recommend dividing your marketing spend up as follows:
40% - Google Paid Ads
35% - Facebook Paid Ads
25% - Content + SEO
Then after you run your campaigns and understand the ROI, you can adjust the percentages accordingly.
If you have already tried and tested what online marketing platforms and channels work best for your business, keep in mind that not all marketing channels will generate leads at the same rate.
Invest your marketing spend in the short term, mid-term and long-term. This will help increase cash flow in the short-term and allow your marketing strategy to grow and mature in the future.
Which Marketing Strategies & Tactics Are Getting The Best Results?
A Study on which Which Marketing Strategies are performing the best
In a recent survey of 2,500 digital marketers, respondents reported on what marketing activities generated the best ROI.
Email marketing still leads the way with the highest percentage of Excellent and Good ROI results reported, with social media marketing following closely behind.
Marketing technologies and automation are proving effective at bringing together the most effective marketing tactics (email marketing, organic search, social media marketing and content marketing) to achieve better results.
Which Social Media Channels Should I Invest in, I hear you ask? Facebook is expected to remain King, with 90% of social media users utilising the platform. Instagram is expected to grow, from 32% penetration to 47% by 2020.
Next, let's calculate your marketing budget.
How Much Should Your Business Budget For Marketing be?
How to calculate your marketing budget based on overall business revenue
For most businesses, their typical marketing budgets fall between 7 and 12% of total revenue. B2Cs generally spend more on marketing compared to B2Bs. Smaller companies also tend to spend more on marketing to gain a healthy annual income faster.
$200,000 - Total Annual Business Revenue
$18,000 - 9% Annual Marketing Budget
$1,500 - Your Monthly Marketing Budget
Can you refine the budget further? Absolutely!
Tweaking Your Final Marketing budget based on CPA
Now you have a rough guide on how much your marketing budget should be; it’s time to tweak it a little.
Because in the previous steps you figured out what your Cost per acquisition is per enquiry or sale, you now know that every x amount of money you spend on marketing will generate a specific amount of sales for your business.
Instead of just calculating your marketing spend based on a percentage of your annual revenue, you can calculate what your marketing budget is, based on how fast you want to grow your business, which results in a more educated decision on what your overall marketing budget should realistically be.