Learning Hub | Digital Marketing Basics
Marketing Budget Example: How To Calculate Marketing Spend
December 23, 2015 | Jon Teodoro
How much should you spend on your marketing? According to the U.S. Small Business Administration, small businesses should set aside about 7 to 8 percent:
As a general rule, small businesses with revenues less than $5 million should allocate 7-8 percent of their revenues to marketing. This budget should be split between 1) brand development costs (which includes all the channels you use to promote your brand such as your website, blogs, sales collateral, etc.), and 2) the costs of promoting your business (campaigns, advertising, events, etc.).
While this percentage may work for some businesses, this recommendation should be taken with a grain of salt. Applying a ‘blanket rate’ on how much you spend on marketing could be detrimental to your profit margins.
Instead, try our method, call the Begin With The End (B.W.T.E.) Method.
Marketing Budget Example: Calculation By The B.W.T.E. Method
The Begin With The End method encourages business owners to do just that: begin with the end in mind. The ‘end’ is usually a sale or a signed contract. For the sake of explaining this example, let’s pretend that you’re a B2B business selling industrial lighting to factories.
Step 1: Figure Out How Much You’re Making
Let’s say that your B2B industrial lighting company has a minimum of $1000 per order. Therefore, it’s safe to say that every sale will yield at least $1000 in revenue for your business.
Keep in mind that the more expensive your product or service is, the more you will have to invest into marketing.
Step 2: Know Your Margins
Of that $1000, suppose your wholesale lighting supplier charges you $300 for the actual equipment. Let’s also assume that your delivery and sales commissions cost you another $200, leaving you with a profit of $500. Congratulations! Your gross profit margin is at 50%.
But not so fast: you probably still have other overhead expenses like rent, salaries for your employees, insurance, etc. Make sure you account for these expenses to get your net profit margin without marketing. Let’s calculate this.
Suppose your other overhead expenses take out another 15% chunk out of your revenues, leaving you with a 35% net profit margin without marketing. In other words, after all of your expenses are paid, for every completed sale you’re making a $350 profit (without marketing)
Step 3: Calculate Your Starting Budget
Now that we’ve returned back from our Microeconomics 101 time warp, we can use our net profit margin data to figure out how much we want to set as a starting budget for our marketing campaign.
You could spend up to $350 to acquire one customer and break even. But who would want to do that? We want to make some money, right?
Let’s be conservative and assume that to start off, you’ll be willing to spend up to $200 to acquire one new customer. That means $150 goes into your pocket; Not bad!
Step 4: Plan and Execute
Based on the previous example, if you are willing to spend $200 to acquire one customer, and you want to sell 100 industrial lights to new customers next year, you will have to set aside $20,000 for marketing. The $200 that you spend to acquire one customer is also known as your cost per acquisition, or C.P.A.
Now that you know how much money you have set aside, you can pick which channels you can afford to market your business in. From there you can set realistic goals and design an appropriate strategy.
Step 5: Measure, Optimize, and Re-Evaluate
Our B.W.T.E. Method still involves a little bit of arbitration, however, you can rest assured that if your math is right, you’ll be making a profit at the end of the day, as long as you stay you keep your cost per acquisition under your break even point of $350.
The first cost per acquisition amount that you decide on should be your benchmark. You should always measure and keep track of how your marketing campaigns are performing against this benchmark.
If certain tactics, like advertising in the Yellow pages, end up costing you more than your benchmark, stop engaging in those marketing activities. If other tactics, like inbound marketing, lead you to lower CPAs, shift your energy towards those instead.
You will want to constantly evaluate what methods are working and what aren’t, then scale up, tweak, or remove them as necessary. You end goal is to bring your cost per acquisition costs down as low as possible while keeping a nice balance of sales volume.
Now Its Your Turn
Try to calculate your gross profit, net profit without marketing, and your cost per acquisition costs. Are they what you expected? Are your marketing campaigns profitable? Which tactics, channels, or methods are working the best for you? Share your results below!