One of the most common questions asked by Small Business Owners is “What Should My Marketing Budget Be?”, and it can be a hard to answer question. In this post, we will take a look at all of the factors that are involved so you can make an informed decision when deciding what to spend.
What Are Your Goals?
Before deciding on a marketing budget, it is always best to specify what you would like it to do for you. This is different for every business and is how you can measure your success.
- Acquiring X Amount Of Customers
- Getting an Infinite Amount of Customers, At or Under a Certain Price
- Selling a Specific Product or Service
- Increasing Email List Sign Ups
A good way to start once you have decided on your goal is figuring out your worst-case scenario. At what price point do you break even acquiring a new customer? By knowing this, you will have a quick and easy gauge of how much your marketing efforts costing or earning you.
Be aware though, many marketing campaigns aren’t cash flow positive without a bit of experimentation. AdWords, for example, can take a few months to show the best results, particularly if your budget or search volume is low and there is less traffic to experiment with.
Your Industry is a Major Factor In Direct Costs
Of all things that can directly affect a marketing budget, the industry your business is in plays the largest role in deciding how much to spend.
Using Search Advertising as an example, cost per click for a Plumber can be $5, while cost-per-click for Personal Injury Lawyers can be $70 to $300 per click. This is simply due to the fact that AdWords functions as an auction. For a Personal Injury Lawyer, a new client can bring in thousands and is worth bidding higher on clicks to bring in new business. For 100 clicks, the plumber in this example will pay $500, while the lawyer would pay $7000 on the low end.
All direct costs are relative to the revenue they bring in. While this a $7000 budget expensive at first glance, if the lawyer in the example acquired 10 new customers for that $7000, and each brought in an average of $5000, he would be looking at a total of $50,000. That is a 614% return on investment. The average stock broker sees only around a 10% return on investment in comparison. If the lawyer only saw 2 clients, it still beats that average by a longshot.
Your Products and Business Model Matter, Too
Aside from the direct cost for a single click, one thing that can’t be ignored is the likelihood of a sale in your industry. In some industries, for every 100 clicks, it is not uncommon to see 30 customers. In others, it could be more like 1 per 100 clicks, or even 1 per 1000. This has a lot to do with your customers, what you are selling, and how they are buying.
To show an example of why this is so, imagine your business offers a towing service. Prospective customers who are stuck on the side of the highway aren’t likely to spend an hour comparing rates and reviewing testimonials.
On the flipside, if your business is Construction, someone looking to build a new house will most certainly click many ads, view many testimonials, and in general take more care with their selection.
Lower Marketing Budgets Don’t Always Mean You’re Saving Money
While every situation is different, a great thing to keep in mind is that lowering your marketing budget doesn’t always mean lower costs. Moving from a $1500 budget to a $750 might save some money in the short term, but might cost you a lot of revenue in the long run.
“A man who stops advertising to save money is like a man who stops a clock to save time.” – Henry Ford, Founder of Ford Automobiles
Even way back in his day, Henry Ford realized that advertising is where the money is. Advertising is an investment in your business, and with digital advertising, a larger budget has more potential to lead to the highest ROI than a smaller one due to the ability to quickly experiment and improve campaigns.
For example, look back to the lawyer at $70 per click. If the budget was $300 for the month, he would only be eligible for 4 or 5 high quality, well-placed clicks. Or, 10-15 low quality poorly placed clicks.
While any traffic is better than no traffic, the likelihood of sales in any one month are very low at that amount of traffic. On a long enough timeline, positive ROI is possible, but experimenting is nearly impossible or takes a long time.
So in conclusion, it is easy to know how much a large marketing budget costs, but impossible to know what a marketing budget that is too low is truly costing.
Knowing What New Customers Are Worth is a Must.
By knowing what a new customer is worth, you can use that information to decide what to spend and have a gauge of return on investment for your marketing efforts. You’ll know if you are spending a dollar to acquire a two dollar customer, you should be buying as many of those as you can. Imagine that I would sell you a $100 bill for $20, how many would you buy?
Often times, it isn’t as simple as that when calculating what a new customer is worth, though.
Price Isn’t Everything When Acquiring New Customers.
In many industries, the cost of acquiring a customer can be close to or higher than what the customer brings in for revenue in the first transaction. While not a perfect situation, all factors must be considered. Take for example a Maid Service who has a cost per new customer acquisition of $80, and their cleaning service is $45 dollars. While you may be taking a hit on the initial acquisition, customers in their business are likely to get a cleaning weekly or bi-weekly, and stick around for 10 years.
If you knew that the average customer sticks around for at least a year ($2340 revenue), you could comfortably spend much higher than $80 and in the long run still make money. While spending more is never ideal, many business owners only look at the sticker price and get discouraged at the cost of a customer, and go for another form of marketing that is cheaper but may not generate any measurable results. (Ex. Print Ads)
To Put It All Together:
- Your marketing budget is relative to the size of your business and your goals.
- The cost of digital marketing can vary greatly from industry to industry
- Base decisions on costs of new customer and long-term revenue (When appropriate)
- A lower budget doesn’t always save money, especially in digital marketing
If you have any questions about budget, or are looking for help in figuring out your own, feel free to contact us and we’ll be more than happy to assist.