I get this question all of the time:
"How do I set my Marketing Budget? How much should it be and what should I spend it on?"
…and, a traditional answer is, "Anywhere from 3% – 12% of your top line revenue number; depending on your industry, competition, market maturity, and other relevant variables." And that's been a standard answer for about 20 years or so, and seems to satisfy most accountants, controllers or investors.
But it's wrong!
If you're running a business, your marketing budget isn't a function of what your current revenue. It's dependent on something else entirely.
If you want to grow your company, your marketing budget is a function of the Lifetime Customer Value (LCV).
"What is 'LCV'?" (I heard you asking that…didn't think I was listening, did you??? 
).
Lifetime Customer Value (LCV) is the all of the money that your customer will spend with you on the front end sale, any up-sales you offer, as well as the back end offers, over a pre-determined period (typically the amount of time that they are your customer).
For example, let's say you're a skin care company and your lotion sells for about $60, and assume that you get a 1% response rate to your offer (a decent response rate to an ad is about 1% – 2%; a well-crafted & targeted offer can bring in a much higher response rate…). Let's assume that on average, each customer will buy 3 more bottles from you over the next three months, and each additional bottle will cost $40; your total LCV = $60 + (3*$40) = $180.
If the cost to acquire the lead is $60, and you get 1% to buy (400 customers), and each customer is worth $180, then you are getting a 300% ROI on your spend (…here's where you pull out your HP-12C & check the math…):
Formula: Return On Investment = Revenue Earned / Cost Incurred
$72k = revenue from the campaign (400 * 180)
$24k = advertising cost (400 * $60)
==> netting you a 300% ROI on your ad spend.
Is this a good return? It depends. It's better than what you'll find on Wall Street or in a bank, but it depends on crafting a good offer for a targeted list. In this example, we projected the kind of return we wanted to get, against our acquisition costs, which enabled us to gain the $72,000 in new revenue. If you've been in business for more than a year, you should have (or be able to figure out) what your LCV is. If you're a startup (as in the company above), you can either use industry comparables or <shudder> use the 3% – 12% of revenue as an estimate. If you do the latter, then set up your operations so you are measuring & tracking this number going forward, and document all of your assumptions about that figure, so you can adjust it based on actual market performance.
…but here's where it gets exciting – that was only one offer focused on one product!
Once you have a customer who has purchased from you and has the Know / Like / Trust Factor with you, you are in a position to ethically position your company to be considered for future purchases. In our example, the skin care company could position another product of theirs or one from their partners.
Or, let's just keep it simple and assume we only used that one offer on a bigger market segment, or improved the incremental performance of that offer? Again, incremental improvements add up to incremental sales…
Bottom Line: Any additional incremental revenue at this point just makes your ROI that much better.
In general, your ability to make profits upfront depends on:
- your product or service
- targeting the right market for your product or service
- your ability to craft and present a persuasive offer in a compelling manner
So, the question isn't, "How to set my Marketing budget?" The question you should be asking is, "How high is high?" "What are my financial targets I want to hit by when, and what are the upfront costs we need to incur to hit those targets, in terms of time, money & people?" This comes from your business strategy & your operational plan. Give me those data & I'll give you an accurate answer.
…not having a quantifiable answer to these questions is a result of laziness and reacting to your business, instead of thinking and managing your business, more than anything else…
