What Size Should Your Marketing Budget Be?

Hello %%First Name%%

Have you ever wondered what amount you should set aside for marketing each year to grow your business?

How do you know what the optimum amount is? As an accountant, I'm often asked this question by startup and small business owners.

So what's the answer? Whilst many business owners are looking for an answer such as £5000 or 10% of sales, I think this completely misses the point.

I believe the answer is...

You should not put a limit on your marketing budget

Let me explain. Whenever you undertake any marketing activity, you need to know whether you make a profit or not on that activity. The only way to do that is to measure the results of the marketing.

To do this you need to undertake direct response marketing as opposed to purely brand marketing. For small business especially it is crucial to ensure money spent on marketing is not wasted. The best way to do this is to record the results of any marketing activity, whether that be direct sales letters, advertising, telemarketing, email marketing, pay per click campaigns, seminars or whatever.

As a minimum, you need to know...

• The cost of the marketing activity
• The sales generated from that marketing activity
• The profit made from those sales

And if you make more from the marketing than it costs you, it makes sense to continue spending on that marketing activity until it stops making you a profit. You'll of course know when this is because you are measuring your results.

By testing on a small scale to start with, you'll never lose too much money if it doesn't work, but when it does work, if you gradually increase your spend on this particular activity, you should continue to do so until it no longer makes you a profit. It doesn't matter how much you spend, as long as you make a profit, it makes sense to continue to invest in the marketing.

And don't stop at just one marketing activity. Test another marketing activity and if that makes a profit continue with that in the same way. Eventually, the aim is to have multiple marketing activities. This is the key to exponential business growth. Not being reliant on one activity, means you continue to grow even when one stops working.

In calculating the profit made from any sale, you should consider the lifetime value from the new customers that you gain. The profit on the first sale may be £100 but if you measure your activities you will know how many repeat sales you get from your average customer and the profit on those. Over the lifetime of this customer you may make £500 profit from them.

Hopefully, this marketing activity costs you less that £100. However, even if this marketing activity cost £100, that will create a £400 profit for you over the lifetime of the customer. Whilst your competitors may consider that the marketing has not made any profit because they only look at the first sale, because you measure everything, you know it actually makes you £400 profit. So they stop, whilst you continue and they don't understand why!

The only other consideration is that you have to manage the cashflow in all of this to ensure you have enough funding before the income comes in.

And who better to help you manage the cashflow or secure funding than an accountant!

For help and assistance with this or for any of your accountancy and tax needs, please give me a call. I'm very happy to visit you without charge for a consultation to discuss how we could help you further.