A beginner’s guide to calculating a marketing budget
Few people would argue that marketing is a vital activity for any business, but it can be tricky to know how much to spend on it – especially with so many different channels available. Spend too much and you might start eating into your profits, but spend too little and you could be losing out altogether. This article will help you understand how to work out the optimum marketing budget for your business.
Why is it important to have a marketing budget?
One of the main reasons for setting a marketing budget is that it really helps you focus on what you’re doing. Say you need a new website; if you know what your overall marketing budget is then you can decide exactly how much of that to allocate to this particular project. This is a good example as websites vary so much in terms of complexity that it’s essential to start with a clear brief and stick to it.
How to work out your marketing budget
To begin with, you need to make three calculations:
1: How much are your customers worth?
The first thing to do is work out the average lifetime value of a customer. How long do your customers stay with you, and how much do they spend over this period in total? What is the gross margin on your services? Use all of this information to calculate the lifetime profit that your business makes from an average customer. Note: if your business is new, then you’ll have to make your best guess as to what this figure will be.
2: How much are you willing to invest in winning a customer?
Now you know exactly how much an individual customer is worth, you can make an informed decision about how much you’re prepared to spend on winning one.
3: How many customers do you want (and how many can you support)?
Your business plan should already specify how many customers you’re aiming to attract per year. This will, of course, depend on all kinds of parameters, including how many customers your business infrastructure can support.
Multiply the figure from Step 2 with the figure from Step 3, and you have your annual marketing budget.
Allocating your marketing budget
Having an agreed marketing budget in place can be very liberating. When you know that you have a certain amount of money ring-fenced for marketing activities, it can help you feel more confident about investing in existing initiatives as well as exploring new avenues.
But don’t get too carried away; be strategic and spend your budget wisely. Consider all of the different marketing tools available to you – including online marketing (websites, blogs, advertising), traditional media, promotions and so on – and decide which ones are the most appropriate for your business.
So you’ve set your marketing budget and drawn up your strategy; now you just need to put it into action. But there’s another important task to remember, and that’s measuring success. Which of your marketing activities are giving the best return on investment, and which should be tweaked or dropped? There are various ways of assessing this, eg by examining your web stats to monitor your online marketing activities. Use this data to inform your ongoing marketing strategy.
Our marketing budget calculation is taken from a tool on the Entrepreneurs Circle website: http://entrepreneurscircle.org/
There are lots of other tools available online to help you work out your marketing budget, including these: