How Much Should I Spend on Marketing?
It’s an age-old question in the advertising world: how much of my hard-earned money should I put into marketing my business and building more sales? Ask any marketing expert and they’ll tell you a different story. Some will say marketing is an investment and you should invest as much as you can, others will say you should contribute 10% of sales, others will say you should always spend more than your competitors.
The right answer is:
“It Depends on What You’re Trying to Accomplish.”
In 2004 Paul Dyson wrote an article in Admap Magazine and described 7 scenarios:
1. Percentage of sales: the budget is a proportion of last year’s actual sales, or next year’s forecast sales
2. Objective and task: objectives are set (turnover, profit, growth) and the budget required to meet these objectives is estimated
3. Competitor: the amount spent by competitors is used as a yardstick; a version of this is the well-known rule of thumb that share of voice should be at least equal to share of market
4. Affordability: the budget is the amount left after everything else has been accounted for
5. Historical: do the same as last year, with an adjustment for inflation
6. Executive Judgment: basically guesswork, but probably an informal use of one or more of the above.
7. Brand Led: a more scientific approach that uses research data and econometric modeling.
The approach would be: think about what you’re trying to accomplish and build your budget around that goal. For example, if you’re trying to lead the market in a service priced at $2000.00 month you could spend:
1. 10-15% of Estimated Sales: 2000 x 50 sales per month x 10-15% = $10,000-15,000/month
2. For the objective grow sales 20%: You could figure that $10,000 = 50 sales and therefore spend $12,000 and expect 60 sales.
3. You could research a competitor and discover that they spend $9000 therefore you could win if you spent $10,000
4. You could realize that you only had $10,000 to spend and just do that
5. You could just decide to spend $10,000
6. You could do a ton of research and modeling and come up with $10,000
Beware of the gut-feeling approaches. From our perspective, the more scientific your measurement, the more likely you can figure out what’s working.
Internet Marketing Takes Out the Guesswork
We love internet marketing because it is so exact in measurement. With tools like Google Analytics we know that a PPC campaign costs $10,000 and yields 50 sales: Here’s how the math works:
• $1.00 per click x 100,000 clicks = 50 sales = (50 x $2000 per product) = $100,000 revenue
• Each $1.00 click generates $10.00 in revenue
SEO is also very measureable with Google Analytics because you can sort by organic traffic:
• $10,000/month on SEO = increase of sales from 50 units – 100 units.
• 50 sales x $2000 = $100,000 revenue increase.
• $200 in SEO = 1 sale.
Old Media Depends on Fuzzy Numbers
Advertising in TV, Radio, Newspaper is a lot harder to measure. That’s why the old media ad world comes up with the difficult models like “Brand Lead” or “Executive Judgment.” If you use your gut to determine Ad spending, and sales increase, you’re a genius! If they don’t, you increase spending until you’re in line with your competitors.
Some Easy Rules to Guide You:
1. Pay very close attention to ROI: Don’t invest in advertising that you can’t measure.
2. Stretch Your Comfort Zone: Once you’ve determined to spend 10% of sales on advertising, think about what it would look like to spend 15-20%. If it would double sales, it’s a no-brainer.
3. Treat Marketing as an Investment: Think of it as you would a company. If it works, invest more. If it doesn’t work, dump it!
This is a Guest Post by Zeke Camusio who is a serial entrepreneur, Internet Marketing expert and founder of The Outsourcing Company, an Internet Marketing agency with offices in Aspen, CO and New York. Let’s Do It!, his blog, is read by thousands of people all over the world.