We hear this question numerous times every week from small business owners who want to understand how much money it will take to get more customers and grow their business. We don’t believe there is one right answer so we’ll try to explain our view on determining how much to spend on marketing.
We like to think of marketing as an investment. When your mindset is focused on spending you tend to miss the mark and fail to successfully execute a consistent marketing strategy.
Once you have set your goals you need to get yourself ready.
This usually means putting in some hard work yourself or hiring someone to help you out. Your setup should include things like ensuring that your website is up and running with analytics tools installed to help you understand what how visitors find you and what they do on your website. It should also include implementing proper SEO best practices, having the right “Call-To-Action” and having a way to convert visitors into leads (this can be for example a web form or a tracked phone line). If you don’t have these basics in place, then you need to invest your time or your money to get them.
Every time you do something to improve your marketing, you’re making a long-term investment in your business.
Marketing isn’t a magic knob that you turn and immediately get a swarm of loyal paying customers. Marketing is a process; it involves getting the word out about your business, your products and your services. It also involves engaging with people, listening to them and providing them with useful and valuable answers. When you write a blog post (like this one), it should be relevant content which adds value to your customers when they read it. Each piece of content then becomes part of your knowledge base. Over time these articles compound and continue to drive more and more traffic, generating more visibility for your small business and hence more reach. Finally, you have to convert these visitors into leads, bringing them further down the pipeline and closer to becoming a paying customer. Every lead represents an opportunity for your local business. It can be an opportunity to educate those potential customers or an opportunity to nurture them with relevant communications. In any case, once they have shown an interest in your company, they become part of your Contact List, which is a valuable asset for every business.
Understanding Life-Time-Value (LTV)
With this perspective of investing in marketing, rather than spending – let’s try to put some numbers around how much money you could spend on each lead.
Let’s assume you are offering a service, for example catering.
- You need to start with your expected profit margin. How much money (on average) do you make from every customer? For this exercise let’s assume you have a 30% profit margin (taking into account all costs like food, labor and other costs).
Let’s assume that you expect your average customer to pay $10,000 for an event, which means you make $3,000 of profit. On top of this, you know that on average every customer will be a repeat customer 3 times over his or her lifetime. This means that every customer’s LTV is $9,000.
- Next you need to know how many leads become paying customers. Let’s assume that 10% of the leads eventually become customers. This means that you need 10 leads for every new customer.
- Putting these numbers together we start with the $9,000 LTV of a customer, and assume that you want to take home 75% of your profit and so you are willing to spend 25% of the profit ($2,250) on marketing. This means that you can then spend:
$2,250/10 = $225 to get a new lead
This is just an example of how to think through the problem. Then, in order to understand how much you should invest in your marketing this month, you need to come up with how many new customers you can service and how much money you can afford up front to get those customers (remember you must keep a close eye on your cash-flow, because these estimates are over the lifetime of the customer).
Let’s say in our example, our caterer can service 8 customers per month. If you are currently serving 6 customers every month (with the existing efforts, brand and reputation) then you need to grow by 2, which means the marketing budget for the month could be set at 2 x $2,250 = $5,000.
We hope this post helps you understand the right way to think of marketing and how to estimate what your marketing budget could be for the month.