It’s a new year, and we’re all looking forward to even greater progress in 2022.
And one of the most common inquiries we get on the phone every day is:
“How much money should I spend on marketing?”
And the answer may astound you…
Because there are really only two methods to decide how much money to spend on marketing.
How Much Should Your Marketing Budget Be?
The first method is the simplest and most time-consuming, which is to set aside 10% of your previous year’s earnings as your marketing budget.
So, if you earned $100,000 in 2018, your marketing spending for 2021 should be $10,000.
However, this method of estimating your marketing budget is not only inefficient, but also limits your possibilities.
Consider this: what if you could invest $20,000, $30,000, or even $50,000 in marketing and get a 10x increase in revenue?
While this may seem hazardous, we’ll teach you how to play it safe by expanding your small company marketing budget methodically.
Building Your Foundation
Years in which you will need to spend more money will come anytime you need to invest in the groundwork for all of your day-to-day marketing operations.
For example, an up-to-date, performance-based website is critical—possibly the most important component of a sound marketing foundation.
Your website is open 24 hours a day, seven days a week for exhibiting and selling your marketing services.
To refresh your website once every three to five years, you will most likely need to go above and beyond your 5% marketing budget.
As a result, the marketing foundation expenditures are often not included in your 5%.
In general, your marketing foundation consists of the following elements:
Strategy for marketing
Design and development of websites
Other items of the same type
Your day-to-day marketing actions will vary from “not very effective” to “a waste of money” if you do not have a sound marketing foundation.
Let’s utilize websites as an example once more.
We speak with a lot of caterers and entrepreneurs that have websites that receive less than 5,000 visitors per month, which is a reasonable amount of traffic for a lot of small businesses.
Consider, however, if one of these websites was underperforming and just one out of every 10,000 visits converted into a buyer (the conversion rate).
A 1 in 10,000 conversion rate would result in only one new online client every two months with 5,000 monthly visits (which is on the high side for many caterers).
If the proprietor of the website spent $1,000 each month on internet advertising, the cost to acquire each member would be $2,000.
Consider an updated and conversion-rate-optimized website—one that turns one out of every 500 visits into a buyer.
With the same amount of traffic and a conversion rate of 1 in 500, we’re talking about 10 new clients every month.
If the website’s owner spent $1,000 per month on internet advertising, the cost to gain each user would be $100.
That equates to paying 95% less to attract each new client.
It’s not always so simple, but we simplified this example to show why it’s usually always advantageous to exceed your 5% marketing budget for infrastructure expenditures.
Calculate How Much You Should Spend on Marketing Using This Formula
So let’s get started by providing the formula we prefer to employ for marketing spending.
Now, CAC stands for Client Acquisition Cost, and most of this essay will focus on determining your maximum customer acquisition cost.
We’ll assist you in doing this by asking you some questions and providing you with some ideas.
You may use this to determine how much money you should spend on marketing.
Let’s get this party started!
Questions to Ask to Assist You in Calculating Your Marketing Budget
Question 1: How much time are you ready to devote to this project?
This is a crucial issue to ask yourself because if you don’t have enough time, you’ll have to hire someone to do it for you.
And employing someone maybe your initial outlay of funds.
This is NOT a part of the marketing formula we just discussed, but it is something to be aware of.
So, in general, when it comes to hiring, you have three possibilities.
You may hire a part-time or full-time employee for $20-30 per hour for someone with 1-3 years of experience.
You may employ a digital marketing agency like us, and our monthly fees begin at $600.
You can engage a freelancer or contractor, whose rates vary, but in general, you should budget around $50/hour for someone competent.
Each choice has advantages and disadvantages.
For example, if you employ a freelancer, they may fail to show up or prioritize your task.
In contrast, if you hire someone, you may wind up spending too much time on training or administration.
But be sure you’re making good use of your time because there might be a huge opportunity cost to doing so.
Now, let’s go into some questions to help you determine your maximum CAC, or client acquisition cost.
Question #2: What is your customer’s lifetime value?
LTV is an abbreviation for Life Time Value, which is the total amount of income (or value) you earn from your clients for their lifetime.
This is crucial to understand since LTV will ultimately dictate how you expand your marketing expenditure.
Because the more the LTV, the greater the amount you can spend and the faster business can expand.
For example, if your LTV is $100 and you want to make $20, your maximum CAC is $80.
However, there are early-stage enterprises that have sufficient financial support to suffering a loss to recruit consumers.
For example, using Max CAC = LTV – Profitability, if your LTV is $100 and you can tolerate a $20 loss, your maximum CAC is $120.
And there’s a classic Dan Kennedy remark that goes like this:
“ The firm with the greatest money to spend on attracting a customer wins.”
Now that we’ve established how important LTV is, let’s look at how to calculate it in our following question.
Question 3: What is your present or anticipated AOV?
The average order value, or AOV, is simply the price your consumer pays for your service or product.
So, if you just have one product priced at $100, your AOV is $100.
However, if you provide various services and goods, calculating your AOV will take a little longer time.
Looking at historical data is the best approach to achieve this.
If you already have a business, get some historical data that shows your total income divided by your total clientele.
If your firm is young, consider anticipating which products/services will be in high demand and calculating an average based on that.
You may always revise your prognosis when new information becomes available.
Question #4: How many times will my consumer purchase from me?
In other words, how will your product/service be used?
Will it be a one-time purchase, like a stationary bike, with no cross-selling?
Is it a monthly service/product that will renew every month, similar to our internet marketing services?
Is this a product that will be used frequently and will need to be reordered, such as food or toiletries?
Determining this is what will lead you to the LTV we discussed previously.
And the more frequently you can convince individuals to return to your product, the higher your LTV will be.
Consider the social networking site Facebook.
Their objective isn’t only to entice you to visit their site once but to keep returning every day and staying for hours.
To calculate your LTV, multiply your average order value by your buy frequency.
Example of a Marketing Budget Calculation
Let’s tie it all together with a fictitious example of how much you should spend on marketing with this technique.
To make things easier to understand, the numbers we’ll be using will be tiny and flat.
Assume that firm ABC has an average order value of $50 and that their clients buy from them four times each year.
In year one, their customer value would be $200.
If you’re a new business, you may surely base your marketing budget on year one.
This would result in an LTV of around $1,000 for firm ABC ($200 x 5 years).
Now that we know their LTV, let’s figure out what their maximum CAC is.
Let’s assume firm ABC wishes to achieve a 10% profit margin, thus we’d use the $1,000 – $100 = $900 maximum CAC.
The final decision to be made is how much cash they have on hand and how many consumers they wish to attract.
In this example, let’s imagine that firm ABC wishes to attract 100 new clients.
Then they need to budget around $90,000 for marketing to achieve their target.
Keep in mind that business ABC might change its forecast and marketing budget at any time.
Keep in mind that business ABC might change its forecast and marketing budget at any time.
For example, they could come upon a digital marketing campaign in the middle of the year that lowers their acquisition costs in half.
This may provide them with additional room for development.
And this would raise the projection from 100 to 200 new clients.
So that’s how a marketing budget is scaled.
That’s all there is to it!
We hope this essay has aided you in determining how much money you should spend on marketing this year.
However, if you want to get the most of your marketing budget, we provide economical digital marketing solutions suitable for businesses of all sizes.
Contact us immediately and our outstanding team would be pleased to assist you.
We are Bangalore’s top best web development company.
Also have a look on Reasons to Pursue a Career in Digital Marketing.