It's one of the most asked questions among business owners: how much should I spend on marketing? The answer can change based on an endless list of variables: your industry, your business goals, your target audience, the current economy and more. Marketers have tried to come up with general budget ranges, but these don't really help you in the long-term.
The Quick Answer
Most marketers tell new businesses to budget 20%, or even 25%, of their projected annual profits to marketing, while established businesses should aim for around 10%, depending on their industry. These ranges are okay for ballpark estimates, but if you've been in business for more than a year, they can cause you to spend too much or too little on your marketing.
A Better Approach
To get a better idea of how effective your marketing budget is, you need to find two important numbers: your Customer Lifetime Value and your Customer Acquisition Cost.
Customer Lifetime Value
Let's say you own an online store where, on average, your customers buy 4 times per year, spend $150 each time and stay with you for 2 years. Your profit margin is 15%.
$150 x 4 = $600
$600 x 2 = $1200
$1200 x 15% = $180
Your customers have a Lifetime Value of $180
Customer Acquisition Cost
Using the same example, let's say that your total sales and marketing expenses were $25,000 last year. Over the course of that year, you obtained 250 new customers.
$25,000 / 250 = $100
You're spending $100 to obtain each new customer
Putting the Numbers to Work
When you run these formulas for your own business, there are three possible results:
Customer Lifetime Value is greater than Customer Acquisition Cost
The common consensus is that Lifetime Value should be 3 times greater than Acquisition Cost. If it is only 1 or 2 times greater, you will need to find ways to increase customer retention, making each customer more financially valuable to your business.
Some people say Lifetime Value should be 4-5 times greater, but depending on your industry, this can actually indicate that your business isn't growing; while your marketing is bringing in long-term customers, you're not bringing in a steady stream of new customers.
Customer Lifetime Value is less than Customer Acquisition Cost
This is obviously a problem because it means you're not making any profit! The problem could be that you're not giving customers a reason to stay with your brand, or you might not be spending your marketing budget on truly effective tactics.
Customer Lifetime Value is equal to Customer Acquisition Cost
This situation is rare, if it even happens at all, but you would treat it the same as the "less than" situation above.
These are simplified versions of complicated, algebraic formulas that handle a wide range of variables including customer churn, future inflation, etc. Still, the basic formulas given here provide a helpful guide for tracking current efforts and setting realistic budget for the future.
If you want to go more in-depth with this concept, just let me know and I'll send you some great resources on it!