Mad Genius
Blog

Finding the Value of a Marketing Spend

Strategy

*Warning: This blog contains math.

Marketing budgets are hard.

Each year brings unique challenges for departments justifying their current marketing spend, or harder still, justifying an increase to them. There can be, shall we say, "wishful thinking" that a new marketing spend can simply be based on a previous return on investment (ROI), but that’s not always the case. 

Marketing teams can be tempted to base a spend on “whatever’s left in the can,” or a percentage of their current budget. Either of those may lead to an underspend that could put the next big product on ice. Or worse, an overspend that tanks ROI.

Let's look at the factors that determine the value of a marketing spend.

How Much Should Most Businesses Spend?

For many marketers, there’s a thought process that marketing budgets/spends should be a certain percentage of annual revenue. This is typically gamed out by the leadership team. According to recent data, 60 percent of marketing directors say their budgets are being scrutinized more closely than they were last year. Those budgets could be anywhere from 0.5 percent, (to which we’d say, “Well, that is technically a number.”) to 20 percent (to which we’d say, “Where have you been all our lives?”). While the latter may be preferred by agencies around the world, it’s not the norm—most marketing budgets float around 9–11 percent.

How to Think About a Marketing Spend

Your business's marketing spend percentage might be a high number or a little number, but that’s not as important as how your organization thinks about the number.

Imagine your marketing budget as a prized racecar. The powers on high depend on your team to drive to the winner’s circle. Cool. But those same powers offer no pit stops, extra gas, or new tires to keep you on the track. Not cool. Even Ricky Bobby would be doomed to fail.

Perhaps your higher-ups see marketing spend as a shiny stack of poker chips. They provide you said chips and beg you to protect them. You're allowed to take a small, safe bet when the time is right, but the goal is to spend as little as possible.

Worse yet, management might look at your marketing budget as a disposable piggy bank to be smashed open at the end of each quarter to help "hit" sales numbers. 

All of these are bad. If your team's outlook is similar to any of those situations, it’s time to take a new approach to how you think about marketing budgets.

How Much Should You Spend on Marketing?

*Warning: Math incoming...

That's a pretty loaded question. A healthy, economically sustainable way to think about your marketing spend is in its relationship to the growth of your business—or its value. The only way to do that is to use your customer lifetime value (CLV). "Lifetime" doesn’t mean their whole life if your business is set up for short-term investments from customers.

CLV is the average revenue you expect to generate from a customer over the time you expect to do business with them. When thinking about what to spend, first uncover what an average customer is worth. From there, plan accordingly.

Let’s say your business offers a $10 monthly subscription service. And let's say the average customer stays subscribed for three years. Your CLV is $360.

If your goal is to gain 10,000 new customers, then the additional revenue you’re expecting is $3.6MM. Pie in the sky? Perhaps. Just ride this magic carpet with us. 

When you have a “real” number to work with, this provides an opportunity to ask more informed questions. Is it worth spending 10 percent of the first year’s revenue ($360,000) to convert 10,000 new customers? Would that 10 percent be enough to do it? Could you do it for a bit less than 10 percent? Maybe you could offer a referral incentive that creates greater urgency and lowers your customer acquisition costs.

Some Additional Factors in Play

As helpful as CLV is, it’s not the be-all end-all. For smart marketers, it’s an essential part of the mix, and understanding its impact on your business’s bottom line will allow you to:

  • Measure the effectiveness of marketing campaigns, promotions, and other initiatives against real revenue potential.
  • Get your leadership to consider bigger revenue goals based on reliable data and realistic marketing spends to achieve them.
  • Highlight areas where customer satisfaction, retention, and even advocacy programs can improve, which all lead to making your business’s CLV more profitable. 
  • Have a more balanced game plan when it comes to short-term and long-term marketing goals.

It’s not uncommon for businesses to wonder how much they should be spending on marketing. But the truth is, there’s no exact one-size-fits-all number. (Trust us, if there were, we would have figured out by now.) Whatever your number ends up being, utilizing information like CLV is helpful in keeping your marketing spend focused where it should be.

If your goal is to acquire and retain more customers, and to maximize the value of their relationships with your brand, we can help. Fill out the contact form and speak with a genius today. (We won't make you do any more math.)