Have you ever wondered 'How much should I spend on Marketing?'
The primary focus of every business is to retain and attract customers…
If a business doesn’t have enough customers then eventually it will run out of cash. It won’t be able to pay the bills. It will fail. To avoid failure a business must be active in retaining existing customers and attracting ones…and that means marketing.
…And marketing requires:-
- Marketing activity – low activity equals poor results
- Marketing investment in either money and/or time – it’s hard though for a business to get a decent flow AND of the right quality without a meaningful investment.
So if marketing is needed a common question from business owners is….how much should I spend on marketing?
What will the marketing spend pay for?
Marketing is all about communication.
Communicating with your existing customers so that they continue to spend their hard-earned cash with you. Hopefully, over time they buy more frequently or buy more of what you offer. Either way, it’s a win-win – more sales and more profit for you and they’re a happy customer.
Communicating with your target market (i.e. the pool of prospective customers) so that over time they’re attracted by what you offer. They decide to buy. They become a customer. You make sales and your profits increase.
When it comes to communicating your message there are lots of options such as; website, pay per click, Facebook ads, SEO, content marketing, leaflets, etc. These all cost money…..
Marketing budget – the benefits/downsides
Business owners who are serious about growing their business will have a financial plan (i.e. budget). As this gives them real clarity on all the vital numbers which drive sales and profit.
The plan will include the sales and each of the business costs….and one of those being marketing.
Having a marketing budget is good.
It makes business owners more conscious about what they’re spending and what they’re getting back in return in terms of the number of new customers. Like any investment, you’d want to know if you’re getting a decent return on your money.
How to set a Marketing budget?
There are a variety of methods a business owner can choose from when deciding on how much to spend on their marketing for the year. Here are four possible methods:-
1 Last year method
With the Last Year method, the starting point is always what was last year’s marketing spend….and then consider if it needs to be adjusted up or down.
Adjusted up IF there is new marketing activity planned (eg a Facebook ad campaign)
Adjusted down IF either :
- Marketing activity done last year will either be reduced or stopped
- There was a one-off marketing project (eg new website) which won’t happen again.
Stay the same IF there’s no intention to change the marketing plans and activity next year.
2 The Sales % method
Under the Sales % method, the marketing budget is calculated by just multiplying your annual sales by a %.
I’m afraid there is no recommended %. No ‘normal’ %. No ‘one size fits all’ %.
Internet searches suggest that a business should spend between 5% to 15% of their annual sales revenue on marketing. The exact percentage depends on factors such as industry sector and plans for growth.
A 2019 survey of UK businesses by Alba found that 76% of all businesses spent less than £416 a month on marketing. That suggests the marketing spend for most businesses is less than 5%.
The final step, having calculated a marketing budget, is to decide how it is to be spent.
3 Task method
Under the Task method, a marketing budget figure is established by creating a budget for each marketing pillar. To do this is essentially a three-step process.
Step 1 Decide on the marketing pillars which are going to be used over the next 12 months.
Step 2 Decide how much you’re prepared to spend on each of those marketing pillars.
Step 3 Add up the budget figures for every marketing pillar to get an overall budget figure.
4 End-Result method
The first three methods are quite similar. They focus on the input – how much is the marketing spend.
The End-Result method is completely different. The focus is on the output – the results you get from the marketing.
To calculate the marketing budget this method, whilst more involved than the other three, is really just answering the following three questions…
Q1 What is the Customer Lifetime Value (CLV) to a business?
The CLV is essentially quantifying how much is a customer worth (or value) to a business. In most cases, the value comes from the profit made on all sales to an average customer. T calculate the CLV just multiply the following 3 numbers:-
- Average Customer Sales Value (divide annual sales by the number of active customers)
- Your Gross Profit %
- How many years (on average) a customer stays as a customer
Eg. IF a business makes sales to an average customer of £10,000 a year on which they make 50% gross profit AND on average a customer stays for 4 years THEN….
The Customer Annual Value (CAV) is £5,000 (being £10,000 x 50%)
The Customer Lifetime Value (CLV) is £20,000 (being £10,000 x 50% x 4)
Q2 How many new customers do you want this year?
As the business owner, you need to decide how much more profit you want the business to make over the next 12 months. After all the extra profit made by the business will pay for you to have a better lifestyle.
Extra profit requires more new customers. To calculate the number of new customers needed just divide the extra profit figure you want by the CAV (see your Q1 answer for this).
Eg IF the Extra Profit figure for the same business as above for the year is £50,000 THEN the number of new customers is 10 (being £50,000 / (£10,000 x 50%).
Q3 How much are you prepared to pay to get a customer?
The answer to this is completely subjective. Everyone’s answer will be different. The answer though will be massively influenced by the CLV for your business (see your Q1 answer). The higher the CLV the more a business owner should be prepared to pay.
A good way (using the example above) of looking at is….
IF the ONLY thing standing in the way of you having the extra £50,000 profit in every single one of the next four years is just 10 customers each paying £5,000 then….
how much would you pay me if I was to sell you one of those customers?
With each customer being worth £5,000 in the first year and £20,000 in total over 4 years there’s a lot of money at stake.
Would you be prepared to spend say £4,000 for each customer?
Let’s do the maths.
For 10 customers that means spending £40,000 once. From those 10 customers you would earn £200,000 in extra profit over 4 years. That means you’d be £160,000 up. The marketing spend of £40,000 may sound a lot but in reality it’s solid financial decision.
The End-Result method…what else to be aware of….
The key to this is knowing the CLV – what a customer is actually worth. It changes everything – especially how much you’d be prepared to spend on marketing to get a customer.
Using the End-Result method the marketing budget is calculated by simply multiplying the number of new customers by the amount you’d prepared to spend to get a customer.
Once done you then need to plan what marketing you’re going to do to give yourself the best chance of getting the number of new customers you want.
SUMMARY
Any business owner who is serious about growing their business and increasing profits needs to have a marketing budget
The method you opt for largely depends on how sophisticated you want to be. No matter which method you decide to use will mean you having clarity on your numbers.
If you don’t know them then ask your accountant – a good accountant will be able to give you the accurate numbers you need.
PS
If you know a fellow business owner who is wondering how much to spend on marketing then please share this article ASAP – it may give them the clarity they need to make progress and grow their business.
If you’d like some help with your marketing budget then give us a call on 0161 410 0020 or drop us an email to wecare@krystal-clear.co.uk
