The vast majority of businesses usually use somewhat arbitrary means to determine their marketing budget, such as a certain percentage of sales. Many business books and educational institutions teach methods like this. In fact, there is a far better, more rational, accurate and deterministic way to do this.
It all starts with knowing how much each new lead and customer cost the organisation. This can be determined relatively easily by analysing historical numbers. You simply add up all costs associated with bringing on new business and divide by the number of new customers or new business leads (depending on what you are trying to calculate) to give you the acquisition cost per customer or lead.
The next step in the process is to decide what sort of customers you are after. For the single transaction sale customer, your acquisition cost must be less than the profit on the first sale. Let’s call this the Allowable Acquisition Cost. If you are looking for customers who will make a number of purchases over a period of time, then you may be prepared to spend more to acquire them. Let’s call is the Investment Acquisition Cost (IAC).
The decision as to what type of acquisition cost you should use is a matter of business strategy. If you are in the IAC category, then you should have a well thought through retention strategy as well. This will cover the various communications and activities you engage in to keep your customers coming back and making repeat purchases. If you forget to work this out and factor it in to you overall marketing budget, you could easily miscalculate. Call this the Retention Budget.
Once you have this worked out, then the next step is to look at your business goals and determine how many new customers you need to achieve them. This number multiplied by your IAC, is the first component of you marketing budget; the new business part . Add this to the Retention Budget and you now have an accurate dollar value for all you marketing.
Armed with these numbers you are in a position to develop specific marketing strategies knowing exactly how much you can spend on each and how effectively each needs to work. By monitoring how effective each strategy is, you can tweak these over time to improve individual strategy performances, grow you business and make it more profitable.