It’s a simple question:

What should your marketing budget be? But there is no simple answer. Even for two companies which are relatively the same size and in the same industry, the answer may be dramatically different.

Why?

There are several factors which affect how much you need to spend on marketing.

The value of a customer.  Typically, you should spend no more than one-third of the gross profit you earn on a sale to acquire a new customer. The longer the relationship, the more supplemental products, the move valuable a customer becomes.

The age of your company. If you have been in business for a long time and you have an established name in your community, you will be able to spend less than a new upstart.

The strength of your customer base. If you have a large number of customers who come back to you again and again or a robust email and mailing list, you already have a strong customer base. Companies with an established base which they have stayed in contact with can focus on marketing engagement and retention rather than introducing their business to a host of new prospects. It is always less expensive to keep a customer than find a new one.

Your Sales Skills. This is measured by your closing rate.  How often does a prospect become a client?    Your closing rate is probably one of the most powerful numbers n your marketing equation.  The better you become at closing sales, the fewer prospects you will need.

The quality of your referral network. Do you have strategic partners who send prospects to you? Do your existing customers like you well enough to recommend you to a friend?

The size of your product line. Companies which offer a core product and add-on services or accessories may be able to spend less on marketing then a company which does not have the ability to go back to the same customers.

Consider the case of  two air conditioning companies. The first works primarily in new construction, installing systems in new homes. They do not have the same opportunity to up-sell that a company which has built a strong service business with annual agreements and extended warranty plans will have. This is true in our business as well. A company which only offers web design will always be on the hunt for a new client. In contrast, a company which also offers social media, SEO and SEM services will be able to keep customers around longer with a steady stream of income and does not need quite as many new customers every month. Both approaches are valid business models– one just needs more marketing.

How much should you spend on marketing?

Simple answer: you should be spending 2 – 5% of annual sales. However, understanding how the elements above impact your business will allow you to make much better budget decisions.

A:  Start with the number of new customers you want. This is where companies who have been in business for a while have an advantage over new businesses.

B:   Multiply the number of customers by the value of a customer. The value is based on gross margin, not gross revenue. Your maximum budget should be no more than 1/3 of this total. Divide the total value by 3The next few steps will help you decide how to allocate that budget. Remember this number; you’ll come back to it when you’ve finished the other calculations.

C:  Determine your closing rate. What percentage of your serious prospects become customers? Review your recent proposals. What percentage of them became clients? This is your closing rate.

D:  Determine how many prospects you need. Divide the number of new customers you want by your closing rate. This will tell you how many prospects you need to reach to hit your sales goal.

D:  Prospect source. What percentage of your prospects come from referrals or leads between divisions and what percent come from marketing activities? Multiply the answer from Point D by the percentage of prospects who come from marketing activities. The stronger your referral base, internal and external, the less you’ll need to spend on marketing.

E: Response rate: How many responses do you typically get to an email offer, direct mail letter or television ad? Divide the answer by your Prospect Source number.

F: Now you know how many people you need to reach. Remember, most people won’t buy the first time they hear about your product or service. You will need to create a plan which will allow you to make between 7 – 10 impressions on your prospect. So multiply your answer from Response Rate by 10. This is the number of impressions you need to make.

There are many different ways to create impressions including, but not limited to social media, billboards, trucks, signs, radio, television, newspaper, direct mail and email. Understanding how many people you need to reach and how often will help you build a realistic marketing plan and set an appropriate budget which allows you to reach enough people to fill your pipeline. If you divide your budget by the number of impressions you need to make you now have an average cost per impression you should be spending. Now you can evaluate the different alternatives to select those which will provide the best value.

Interested in trying this marketing calculation? We have simplified the budget calculations by creating a marketing budget worksheet. Click the link below to download a free copy.