As a business owner or marketing manager of a small to midsize business, you may be wondering, "how much should I spend on marketing?" This is a question we get a lot from new clients, especially those who have aggressive growth goals for the year. While there is no one answer that suits every business, this is the advice we give to our clients:
Think of Marketing as An Investment
Smart business owners know that they need to invest in marketing their business in order to reach new customers and increase revenue. The biggest mistake an entrepreneur can do is decide to not spend money in order to "save." This can have the opposite effect on your business, preventing you from reaching your true potential. Instead, think of your marketing budget as an investment into your company. The trick is investing your dollars into the right marketing tactics that will strategically drive revenue and help reach your goals.
The question is: How much?
The Quick Answer
If you're looking for some hard and fast numbers, SCORE suggests that as a general rule businesses with $5 million in annual sales should allocate between 8 - 10 percent of revenue to marketing. That means, if your business grosses $5 million in revenue per year, you should be investing at least $400k each year or $33k per month into marketing your business. That could be made up of a combination of advertising, outsourcing work to an agency partner and the tools used to handle your marketing efforts. If you are launching a new business, expanding, or introducing a new product or service, you may need to allocate even more, up to 20 percent.
The moral of the story here is the more traction you need to make in a smaller time, the more money you should plan to invest.
But there is some variability to these numbers. HubSpot releases a study on the State of Inbound each year with survey results from nearly 4,000 businesses across 150 countries. In 2014, the average yearly marketing budget based on number of employees was reported to be:
- Less than 10 employees = Less than $25,000
- 11 to 25 = $25,001 - $100,000
- 26 to 200 = $100,000 - $500,000
However, those numbers do seem to vary for mid-size companies the most:
The Longer Answer
As you can see from the chart above, there isn't one size fits all when it comes to a marketing budget. The real answer to the question is this: It depends on your goals and your average cost per lead.
Hang onto your hats, because this is where the real fun begins!
Starting with Your Cost Per Lead
When it comes down to setting a marketing budget, the first thing you should do is determine your cost per lead. This is how much you need to invest to generate one lead through your marketing efforts.
A survey conducted in January 2012 found that inbound marketing-dominated organizations experience a 61 percent lower cost per lead (CPL) than organizations that predominately leverage outbound marketing.
- The average cost per lead for outbound-dominated businesses was $346.
- In comparison, the average cost per lead for businesses leveraging primarily inbound techniques was $135.
What's your CPL? Let's say you have an inbound marketing budget of $5,000. From that campaign, you generated 30 leads. Based on those results, your cost per lead is around $166. If you wanted to bring in 100 new leads, you know you'd have to invest at least $16,600 into your marketing.
Understand Lifetime Value
Understanding your CPL is really just the start of the equation. You need to look at the full sales funnel to determine how many leads you need to make your goal. One of the most important metrics in setting your lead goal is looking at the average Lifetime Value (LTV) of one client. Let's say that your average client is $25,000 per month, and your average engagement lasts 6 months. Knowing that, we can determine that your average LTV is $150,000.
Let's say you have a goal to generate $1 Million next quarter. Based on your average LTV for 3 months, you know that you need at least 13 new clients to hit that goal.
Figuring Out Your Budget in 4 Easy Steps
But wait, there's more!
Cost per lead and lifetime value are not the only metrics needed to determine what your marketing budget should be to hit your revenue goal. You also need to know how many of your leads are qualified, and then of those, how many you close.
You can determine your budget by working backward from your goal:
Step 1: How many new clients do I need: You have a revenue goal of $1M this quarter. You know that your average 3 mo. engagement has a value of $75,000. If you divide your goal with the average value, you'll figure out you need 13 new clients this quarter.
Step 2 & 3: How many leads will get me a new client: Not every lead is going to turn into a client -- and sometimes that's a good thing. You should work with clients that are best suited for your business, expertise and budget. If you took every lead that came to you, you might weigh down your staff with low-value work. Instead, you work to nurture your leads through being marketing qualified leads (MQL), those that are engaged and complete an action to show they have a need, and then to a sales qualified lead (SQL), the prospects that meet all your sales requirements, including budget, scope, culture, etc.
By examining your results over the last year, you can calculate your close rate, which we find is 30 percent. If you need 13 clients, then we need to divide by your close rate .3 to expand that to the number of SQLs you need.
Now that you know you need 43 SQLs, we need to expand that even further to discover how many raw leads (qualified or not) that you should generate to ultimately get to 13 clients. To do this, we look at how many leads typically become SQLs. You find that approximately 40 percent of leads that come in pass all of the sales qualifications. We divide 43 by .4 to find that you need a total of 108 leads to get you 13 new clients.
Step 4: How much should I spend in marketing? Earlier we determined your CPL (cost per lead) is $166. If you need 108 leads, and it costs approximately $166 to bring in each of those, you should plan on investing no less than $17,928 per quarter.
Calculating Your Marketing ROI
Now you may be thinking, "$18k dollars is a lot of money!" But it really isn't. Take a step back and look at your goal: You want to bring in $1 million this quarter. If you invest $18,000 and end up hitting your goal, you will have a return on investment of 55.56x. For every $1 you invest, you will bring in $55.56.
In order to really understand what you should invest in marketing, you need to examine your goal and your average sales performance. What may seem like a lot to invest doesn't seem so bad when you look at it in these terms, especially when you have a fantastic ROI.
Spending Less and Making More
Of course, these numbers are strictly hypothetical. If you wanted to decrease your budget but still hit your goal, you should focus on decreasing your cost per lead. One way to do this is to focus on the marketing methods and channels that are bringing in the most qualified leads.
For example, a study found that the average cost per lead for B2Bs in North America was dramatically lower for inbound marketing strategies than for outbound marketing, the traditional advertising channels like direct mail and cold calls.
If you want to invest less and make more, examine all of your existing marketing channels and look at how many leads they are bringing in. You may find, for example, that trade shows and social media marketing are bringing in more leads than email marketing and direct mailers. Based on that information, you can focus your investment on the channels that work, and then try new things that may help drive the cost per lead down.
At the end of the day, follow this Rule of thumb: Invest money to make money.