Much of your small business’s monthly budget is straightforward: You have fixed expenses, such as rent, and variable costs that fluctuate with sales. What’s left — including marketing costs — comes straight out of your profit margin. A Gartner 2015–2016 survey of chief marketing officers at 330 organizations found that marketing dollars represented 11% of corporate revenues, and one-third of those surveyed expected marketing budgets to grow in 2016.
To calculate what you should spend, ask the following five questions. They can help maximize the value of your dollars and tailor the “spend” to your needs.
1. Who is your ideal customer? First and foremost, understand who you are trying to attract and why. You likely seek loyal, repeat customers who are easy to work with and who have characteristics in common. For business-to-consumer (B2C) companies, these attributes may include demographics, interests and location. For business-to-business (B2B) companies, look at size, location and industry. You can have several ideal customers, but your marketing should focus on one at a time.
2. What is the customer lifetime value (CLV)? Once you’ve defined ideal customers, ask a few questions to help determine how much they are worth in dollars and cents:
For example, a restaurant might analyze a customer who dines four times a year, spends $100 per visit, and remains a patron for three years. That’s $1,200. Subtract the cost of food and other variable expenses (let’s assume 25%), and that patron’s CLV is $900.
3. What’s the most you’re willing to spend per new customer? For our restaurant-goer above: How much would you spend up front to earn that $900 over three years? How about $100 for an initial, one-time spend to turn that new, long-term customer’s head? Once you determine how much you can spend per month to attract this kind of customer, use that figure to help build your marketing budget.
4. How many new customers do you want? There are two ways to approach this question. One is to work down from a goal, such as five new customers per month. Using the $100 up-front spend per new customer described above, you would have an overall monthly budget of $500. The second approach is to work up from a maximum spend, such as $300 per month, which, in our restaurant marketing budget scenario, would limit you to three new customers per month. Of course, there’s no guarantee that what you allocate to spend per potential new customer will win that customer every time. Your marketing campaign results can help hone your strategy.
5. Which campaign earns more customers? Here’s where we close the loop. Consider two campaigns, each costing $100. If Campaign A resulted in two sales, and campaign B resulted in six, you know that moving more of your budget to Campaign B is likely to have a higher return on investment (ROI). By continuing this process with different A and B campaigns over time, you’re essentially creating a feedback loop that helps you determine the best ways to spend your marketing dollars.
Creating a marketing budget is an ongoing process. You may start with a maximum figure, but by testing and re-testing, you can squeeze greater value from every dollar spent.
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