What percentage of revenue should be spent on marketing?

This is one of the most common questions I get asked, especially when signing up a new client. Although I don’t have a clear cut and easy answer, I have put together a framework to help you determine an appropriate budget for your business:

1. Sustainability

The number one rule of thumb is that you have consistency in your digital presence. AdWords and Facebook advertising platforms learn over time about your business objectives and optimize your campaigns from data collected over time. Typically, the more an ad is run, the better it can perform so if you have a highly fluctuating budget it becomes more difficult for these algorithms to adjust and too many changes too quickly to your campaigns can have negative consequences.

Digital advertising is more efficient than any other traditional form of advertising. Your ability to target specific people at specific points in time along with the reporting capabilities of how many people viewed, interacted or purchased your product or service means that YOU NEED TO HAVE A BUDGET here. If it’s not working, then your message, targeting, product or service needs to be evaluated, not the medium. The good news is that digital marketing can be easily adjusted. If something isn’t working, then make some changes once you have collected enough data to confirm it’s not working.

If you are new to digital ads, then you should think about what you can afford to spend even if your campaign has some rough patches. A common mistake by business owners is that they say “I will give you a try for a month and if it’s not working I will cancel.” Instead, they should be thinking that if it’s not working, let’s figure out why, make adjustments and continue forward. The digital landscape is in a continuous state of change and your campaigns should also be looked at, adjusted and tested continuously.

2. Measurement

A common mistake by many business owners is to try a bunch of tactics without clearly attaching a business goal. As an example: You may be thinking “I know I need to be on Facebook, all of my competitors are on it and I have no social presence.” So, you go out and hire someone to add content to your Facebook page which increases the activity on the page, but it’s not helping sales so you eventually see it as a place to cut expenses down the road. A better way to think of it is: “Relationships drive my sales. I need more relationships and Facbook is a good place to start them. I’m going to add content to attract my primary demographic and measure success based on how the relationships are progressing, i.e. are they engaging in the content, asking pointed questions or requesting more information?

Set the goal, put a budget behind it that is sustainable and measure success of the business goal!

If you are an ecommerce company, it can be very easy to measure a direct impact on sales, but if you offer a product or service with a long lead time between 1 and 18 months, then you will need to make sure that you can track leads past the marketing funnel and into the sales funnel. This is where a good CRM can help you view a sale going all the way back to the original marketing campaign that attracted them to you. Without this information you will never be able to know which channels are providing the most customers and opportunity for your business. If you can’t answer these questions, then you should be looking to upgrade your CRM:

1. What is my conversion rate from lead to sale?
2. What is the lifetime value of a client and who are my most profitable clients
3. Who are my most productive sales people: what are their conversion rates from lead to sale, which sales people get me the most profitable clients?
4. How much in advertising budget do I spend to get me a new sale on average and which campaigns drive the lowest cost per sale?

3. Profitability

Once your sustainable budget becomes profitable, then it’s time to begin thinking about increasing your budget. If you are an ecommerce company with visibility from top-of-funnel image and awareness down to the final sale, then it will be a much easier task than someone who sells a product or service with a long lead time.

Here are some different ways to look at the data and determine where you should increase or decrease budgets. This will get a little technical, so I recommend speaking to someone with experience or hiring an agency.

1. Break out your campaigns into Top, Mid and Bottom Funnel first. Typically your social postings and boosts will fall under top, user engagement such as adding someone to your email list would be Mid and clear intent ads such as Google AdWords search ads will fall to the bottom of the funnel.
2. Look at your stages of the funnel to get a cost per acquisition by dividing the total dollar spent by the number of sales you have (total sales, not just from digital ads) for any given month (use weekly if you have less than 1 year’s worth of data.) Add them into an excel spreadsheet and run a correlation function which will show you the correlation of the ad spend to the number of sales you are getting. A 1.0 result means that you have perfect correlation and that for every dollar in new ad spend would get you one new customer while a 0 means that it makes no difference how much you spend, it has no impact on your sales.

   For top-of-funnel, it can be a bit trickier since the lead cycle is longer so the correlation of the sale won’t match to the time period you placed the ad. In these cases, move the correlation out a month, two or however long your lead-cycle is to find the best correlation to the time period. The same can hold true for Mid-Funnel.

3. It’s easy to find correlation with Bottom funnel and the data will always tell you to move more into this category if you are profitable, but look at the Top and Mid and if you see correlation here. If there is a correlation then run the correlation from spend to cost per sale instead of number of sales. This should tell you how much you would have to spend to drive the cost per sale down further. If profitable, then you will want to spend more here. If it’s not, then you should consider changing up your message or strategy.
4. Make sure you have enough data to make decisions! If you are spending under $1k a month in digital ads, then it could take many months or years to fully determine if your strategy is working. Sample data sizes are too small to make clear determinations at this spending level but the exercise can still provide you some deeper insights or give you some very rough idea of what is working or not working.