Ah, the old chestnut! It’s a tough one, isn’t it?
You know you’d like to at least sustain if not grow your business and capital is always a limited commodity so how does one answer this age-old question?
As a digital marketing agency, we often find ourselves at the receiving end of this questions and the answer almost always is – “it depends”.
The good old rule of thumb?
Here are some of the rules (read guides) that you may have come across:
- Total Revenue x 5% = Marketing budget required to maintain current awareness and visibility
- Total Revenue x 10% = Marketing budget required to grow and gain market share
- Net Revenue x 1% = Marketing budget for established products
- Net Revenue X 50% = Marketing budget for launching new offerings
Now it goes without saying that these are at best just rough guides and the budget that is right for you may not be right for the next business. An x percentage of your revenue etc. to us is just a little too airy-fairy.
So how do I decide what’s the right marketing budget for my business?
We can’t tell you what’s the right marketing budget for you but we can certainly tell you how you arrive at that figure in a digital marketing context.
Firstly, it is worth noting that with digital marketing you get lots of data so you can learn and optimise your budget quickly.
The reason ‘quickly’ is emphasised is because it is important to define what it really means in this context.
Let’s say you can only spend £10/day on a new Facebook Ad campaign (£300/month), and cost/click is £1, so you are going to get 10 clicks every day or 300 clicks over the month.
Now 300 clicks, typically, are not enough to draw any meaningful conclusions from, so you may have to run your campaigns for 3 months to gather enough data, establish trends and start to fine-tune your campaigns.
I bet all of sudden it doesn’t seem so quick, does it?
The issue with collecting data over 3 months is that you will have a number of variables coming into play that will skew your data and throw you off the scent.
This is the reason why we suggest to our clients that you are always better off spending more in the first 2-3 months in order to really learn quickly.
okay, that makes sense but how do I get to figure?
In short, work it out in the reverse order i.e. figure out what a lead/sale is worth to you.
Let’s say a lead or sale is worth £1,000 to you on average, and you can afford to spend 10% of that to acquire that lead or sale.
The typical conversion rate of a website is 1% (you may know your conv. rate already in which case use that %) so you will get 1 lead/sale for every 100 clicks.
Using our previous example, let’s stick with £1/click so that £100 to get 1 lead/sale.
Here is the calculation summary:
Clicks: 100
Cost/Click: £1
Spend: £100
Conv. Rate: 1%
Conv. (Sale or Lead): 1
So based on that model, £1,000/month will give you 10 sales or leads per month.
Let’s not forget, this is just a model to use to start off with, you (or your agency) will be optimising your campaigns to:
- lower your cost/click
- improve your conversion rate
Which means that you will incrementally see a better return as more data is collected and the campaigns are optimised.
How ‘quickly’ you want to get to that optimum point is now up to you!
I hope you enjoyed reading this blog. If you need help with working out the best marketing budget for your business or you are struggling to figure out what cost/click you can expect from a channel then please contact us and we’d be delighted to help.
