When I’m speaking to small business owners about their marketing, I often receive questions about marketing budgets. How much will this form of marketing cost? How much should they budget for the year on marketing? Etc.
I have mixed feelings about marketing budgets. I think there are some pros and cons, as follows:
- If you have a budget, at least you’ll allocate money towards marketing.
- If you think through your marketing goals and create a simple marketing plan, you’ll at least have an idea for how much marketing investment will be required to achieve your goals.
- When you’re testing new forms of marketing that are not yet profitable, it’s good to have a budget to limit your losses.
- If your marketing is profitable, then you’re limiting yourself by having a budget. If you could make $2 for every $1 you invest in marketing, wouldn’t you do that all day long? It’s not easy to find a return on investment (ROI) like that anywhere else.
Here’s the marketing planning / budgeting process I recommend:
1. Start with your goal and then work backwards.
How much money do you want to make? How many customers will you need to acquire to hit that goal? How many leads typically turn into prospects and then customers?
Do the math and figure out how much money you may want to invest in marketing to reach your goal.
Here’s a simplified example. Let’s say you wanted to generate $250,000 in revenue for 2012 and each new customer is worth $1,000 to your business. You’d need to acquire 250 new customers. If you convert 1 out of 3 leads into a proposal, and then 1 out of 3 proposals into a sale, then you’ll need to generate 2,250 leads over the year. (250 X 3 X 3 = 2,250).
2. Create your cost-per-lead number
How much can you afford to pay per-lead and per-customer?
Let’s say you’re willing to invest $1 to make $2 in profit. So, you’re willing to invest $333 for a $1,000 customer, and you’ll earn $666 in profit for each customer. You’re doubling your money.
Now let’s assume you have a multi-step sales process, where you first generate a lead and then create a proposal before your customer decides to buy.
First, divide the $333 customer cost by 3, because we’re assuming 1 out of 3 proposals turn into a sale, and that’s the rough amount ($111) you should be willing to pay for each proposal. Then, divide $111 again by 3, because we’re assuming 1 out of 3 leads turns into a proposal. Based on this arithmetic, you should be willing to invest $37 to generate a new lead.
Now we’re making progress! It might be hard to see how you can invest in marketing to generate $250,000 per year, but once you break it down into a per-lead cost, it becomes much easier to see. Start thinking: Where could you invest in marketing to generate a lead for $37 or less?
3. Create your total investment number
The next question is, how much total investment may be required to reach your goal? You’ll want to generate 2,250 leads, and each can cost up to $37, so you’ll be looking to invest $83,250 over the course of the year on marketing.
Now, don’t freak out. $83,250 isn’t your “marketing budget” — it’s just a rough estimate. It’s the number you think you’ll have to invest in order to reach your initial goal of $250,000 in revenue.
You’re NOT going to rush out and spend $83,250 at once, because you could very quickly and easily lose most of your principal if you’re not careful. And you’re also not going to divide $83,250 by 12 months and commit to spending $6,937.50 per month on marketing. Not at this stage. Instead, you’ll start by testing small, and reinvesting your profits as you go. And if your tests are working, then you scale up your marketing investments.
At this point, you’re just expanding your thinking. Where could you invest $83,250 to generate 2,250 leads at a cost of $37 per lead? Are there enough clicks available in Google AdWords to support your goal, or will you need to use multiple forms of media, including direct mail, print advertising, joint ventures, etc?
Do some research to analyze potential marketing outlets, and then start testing.
4. Start testing – with a budget
It’s in this initial phase where it makes sense to have a marketing budget, so you limit potential losses as you’re experimenting with various marketing outlets.
Test with pre-specified amounts of money to find what works. I recommend you test in increments of less than $5,000 at once. And that’s plenty for many marketing outlets.
For example, in most business categories, a $5,000 initial budget for a Google AdWords test is plenty to get a sense for initial performance. And many other forms of marketing require less outlay. For example, you can test a postcard marketing campaign for just $500. Depending on where you’re located, you may be able to test a newsletter ad for much less than $5,000.
Related article: Google AdWords Budget: How much should you spend?
5. Track and measure as you go
Be sure to track the success of each test as you go. (Related post: How to Track Offline Sales)
Keep an eye on your original assumptions and adjust as necessary. If you find that 1 out of 4 leads are turning into proposals, and 1 out of 5 proposals are turning into leads, then that means you can’t afford to pay $37 per lead. Instead, your new cost/lead target is $16.65.
6. When you find what works, scrap the budget
Once you find an area of your marketing (whether it’s Google AdWords, or direct mail, or TV advertising, or newspaper advertising), scale it up as high as it goes while remaining profitable. It’s in this scaling phase where a marketing budget makes no sense. If you’re earning $2 for every $1 you invest, why would you limit yourself?
That said, when your marketing begins to take off like this, you may actually have some limitations on your ability to serve customers. So perhaps you’d want to slow down on your marketing investments while you hire more employees, or do whatever else you may need to do to scale your business.
But if you have the ability to generate $500,000 or $1,000,000 per year by increasing your marketing investments, go for it! Don’t limit yourself. Just make sure you start small, and test cautiously and reinvest aggressively.
Share Your Feedback
What’s your goal for 2012? Did this post change the way you’ll think about your marketing budget? Do you have any questions about your marketing budget or marketing plan?