A curve ball I often get thrown by clients is, “How much should I spend on marketing?” While the first response that generally jumps to mind is “How long is a piece of string?” In digital marketing you can spend as much or as little as you want but to hit that sweet spot I've found that there is a pretty decent way to budget your marketing spend - you've just got to work backwards.
First, consider what you know about your customers - hopefully that's a fair bloody bit.
You should be able to determine demographic (who the person is, culturally) and psychographic (what the person is thinking) makeup of your customers based on the data you've received throughout the purchasing process. More importantly - you'll be able to get a detailed picture of their purchasing habits. No matter who your customers are, if they've purchased from you then there should be a decent trail of information to inform your marketing budget.
In this instance, you'll want to identify the average spend of your customers - then extrapolate that out to their average lifetime spend. Or as folks in the biz like to call it, their 'Lifetime Value (LTV)' to your business.
Let's get a bit Dustin Hoffman's 'Rainman' here, and play with the numbers:
If your customer's average spend is $100, they purchase around twice a year (say Christmas and Birthday) and they generally purchase with you for 5 years - we can say their LTV is $1000. For the mathematically minded that's:
- AVG. SPEND x PURCHASES x CUSTOMER LIFETIME = LTV
- or: 100 x 2 x 5 = 1000
This LTV becomes important when we get to working out marketing budgets. A good rule-of-thumb I share with my clients is to spend at least 10% of your customer's LTV on marketing for customer acquisition. So if your situation happens to match those very convenient and round numbers above, you should be looking to spend $100 per new customer.
So if you're after 500 new customers who, on average, will net you $200 a year you should be spending at least $50,000. That may look like like a big chunk of change, particularly as most of you would have figured out above that the average customer spends $200 a year in this scenario but it's important to remember that we're looking at the big picture. Those 500 customers are going to bring in $500,000 over the next 5 years!
This works for other industries too - let's say your business is B2B and you're selling a SaaS platform. If your pricing is $100 a month and your customers generally stay with the platform for 3 years, the equation looks like this:
- 100 x 12 x 3 = 3600 (LTV)
- 3600 x 0.1 = 360
So $360 is minimum amount per new customer you should be allocating towards your marketing spend.
So sure, in cases where purchase amounts are smaller or more infrequent it may be a big pill to swallow in the first year, but looking over the lifetime value, you'll be making bank from a relatively small investment. The channels you invest that dosh into is a whole other story - but luckily, we've covered some of the ways to determine how to reach your customers in the past!