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How much should I spend on marketing?
By John Joyce, President
Red, Incorporated
Strategic Marketing and Design
Business owners have come up to me and asked a couple of great, obvious questions: What are the costs involved? How much should I spend? Business owners often tell themselves: “I've already sunk a fortune into this business, I can't afford to spend any money on advertising and marketing.”
My answer to that is this: if you want to grow your business, you can't afford not to spend money on advertising and marketing.
There’s one quick answer to the question of how much you should spend on marketing. You should spend as much money on marketing commensurate with your business goals. In other words, how much is a customer worth to you?
There are many formulas used to calculate “customer worth,” but I like this one.
To figure your customer worth or sale worth, take your average sale amount and subtract the costs associated with the sale (including commissions) to get your average gross profit. Generally speaking, marketing expenses should be a percentage of this number that I'll refer to as the "marketing cost per sale."
For example, if your average gross profit per sale is $10,000 and you allocate 10 percent of that for marketing then your marketing cost per sale would be $1,000. Of course, you're not likely to get a new customer each time you invest $1,000 in marketing, but it’s a good average starting point.
When you’ve determined how much to spend, then it’s important to establish a budget for your marketing expenditures.
One of the most common and easiest methods is to use the percentage-of-gross-sales method. Take a percentage - usually 2 to 5 percent of gross sales for the previous year. A new business will need to rely on projected sales for the coming year. The resulting figure is the amount of money you'll allocate to promoting yourself to the public.
One other thing, keep in mind that you must think long-term when analyzing the effectiveness of your marketing dollar. After all, you want to keep your best customers for as long as possible.
