Apr 10, 2017
You can choose how to calculate your marketing budget from a few different options. We will only discuss a couple in this post, but for other methods of how to calculate your marketing budget, see Savavo’s earlier blogpost on that topic.
One simple and popular way is to just commit 10% of your business’s annual revenue to marketing. Another way to calculate how much to spend on marketing is with Cost Per Lead (CPL) and specific sales goals. Cost per lead, or how much it costs to bring in an individual who expresses interest in your product or service (but does not necessarily become a customer), helps to measure if you are spending enough on your marketing budget or too much. While we provide a more in-depth explanation of how to calculate cost per lead on our blog, in this case we will simplify it to be:
|Past marketing budget ÷ Leads during that period = Cost Per Lead|
As a very simple example, let’s say your total revenue last year was $10,000 and your marketing budget was $1,000. In that time, you got 100 leads and 20 customers. Calculating cost per lead would proceed as follows:
|$1,000 / 100 = $10 per lead|
Let’s say your sales goal for the coming year is to have a revenue of $50,000.
To calculate your marketing budget using cost per lead, you would calculate the following:
|Number of customers ÷ number of leads = customers to leads ratio||20 / 100 = 1 : 5 For every 5 leads, 1 became a customer.|
|Total revenue ÷ Number of customers = average revenue per customer||$10,000 / 20 = $500 Each customer paid an average of $500.|
|Sales goal ÷ avg revenue per customer = Number of customers needed||$50,000 / $500 = 100 You need 100 customers to reach your sales goal of $50,000.|
|Plug number of customers needed into ratio to find number of leads you need||1 : 5 = 100 : LeadsLeads = 500You need 500 leads to reach your sales goal.|
|Number of leads x CPL = new marketing budget||500 x $10 = $5,000 To reach your sales goal, your marketing budget should be $5,000.|
Remember: this is a simplified marketing budget example. When choosing your real marketing budget based on sales goals, make sure you keep the goal reasonable and achievable. You don’t want to wipe out all of the money you have trying to reach too high too fast.
Two other important measurements to understand for your marketing budget are Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV), as well as how they are related. CAC is the cost required to acquire a customer, and can be calculated by dividing the entire cost of sales and marketing over a period by the number of customers acquired during that period. To calculate lifetime value for a customer, either find the sum of the gross profit from one individual customer since they first used your brand, or use the following equation:
|ARPCL x GM x RM = Customer Lifetime Value|
|ARPCL = Average Revenue Per Customer LifetimeGM = Gross MarginRM = Referral Multiplier|
To see how to calculate lifetime value for a customer in greater detail, see our blog post about calculating lifetime value.
Understanding CAC and LTV allows you to check that you are not spending more on customers than they are worth. If it costs $500 to acquire a customer, but the customer’s lifetime value is an average of $150, you are not being profitable. Acquiring your customers should not cost more than the value they actually offer. Understanding these calculations can help you know how to calculate your marketing budget and see that it’s being spent in the right ways.
Having these calculations and equations in your marketing toolbelt will set you up for profits and success in your business. A marketing budget template can also provide a map of where you want your marketing to go. With marketing for your business, you don’t have to feel unprepared. For any marketing needs you may have, Savavo can be here to help you through every step.