How much should you spend on marketing?

marketing budgetHow much should you spend on marketing is a question I get asked a lot.

Let me see if I can answer it.

There are companies who spend a huge amount on marketing. Red Bull is, perhaps, the most famous of these. The costs of running an F1 team, an international go-kart series and sponsor huge numbers of adventure junkies doesn’t come cheap. The last figure I saw was 38% of revenue.

At the other end, there are companies who spend almost nothing. If they can get all the leads they need through word of mouth, I wish them all the best.

So let’s return to the question. Seeing as I am a consultant, let’s start the answer by asking you a question – or three.

  1. What did you spend on marketing last year?
  2. Which marketing activities delivered a positive return on investment?
  3. Did that spend lead to you achieving your growth target for the year?

The final question is the most important of the three. Your marketing is there to do one thing: generate the sales opportunities you need to achieve your growth target for the year. Once you know what your growth target is, you can work out what you need to spend on marketing to achieve that target.

So what are the steps?

Your Growth Target is…

Already mentioned but needs to be reiterated because of its importance

How many clients do you expect to lose in the coming year?

If you are to grow your business, the number, and value, of new clients needs to be higher than the number, and value, of clients you lose. If your growth target needs two new clients a month, but you are losing one a month, your marketing needs to deliver three new clients per month to achieve your target.

How many new clients?

If your growth target is 10%, what does that look like in terms of new clients? The value of an average client can easily be calculated (annual turnover/number of clients invoiced). I understand that your clients can range from very small amounts to very large amounts, but you need to have an average to start this process. If you want to complicate matters and say you need X large clients and Y small clients, it’s not a problem, but you are making life hard for yourself. Partway through the year, you will need to assess your performance and adjust things if you find you are only picking up lots of small sales, rather than the mix you normally have.  If you are just picking up large clients, your problem is delivery resource rather than marketing activity.

How many leads?

For every sale you made, how many leads did you do sell to?  To deliver on your growth target, you need to generate enough leads to close enough sales (total number of leads last year/total sales). Now you have this figure, simply multiply it by the number of sales you need to make.  You now have your lead target for the year.

Which marketing channels worked best?

If you only use marketing that you know works, you maximise your return on investment from marketing.  If you continue to use marketing tools that don’t create leads, you are wasting money and reducing your ROI. How much did you spend on each channel and what was the ROI for each channel?

Is that enough?

If you simply repeat the marketing, that worked, you did last year, it is likely you will get a similar number of leads to last year.  Is that enough for you to hit your growth targets?  If not, how many leads are you short of your target?

What else?

What can you do that you didn’t do last year?  It may be that you can simply increase the amount of activity on the marketing channels you know worked.  If email marketing delivered 200 leads last year, and you need 300, is it likely that doing 50% more email marketing will deliver the leads you need?

The alternative is to do something new.  How much networking do you do?  Does your target audience go to trade shows and exhibitions? What do you need to spend on these to generate leads?  For new marketing activities, you will need to estimate, but I am sure that people within your network will have done them, so will be able to give you good advice to help with this.

What is the total cost?

By adding the spend for each channel you plan, you then have your marketing budget.

The question then is: do you want to spend that much?  The answer to that question depends on how important your growth target is to you.

 

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