How much should you spend on marketing?

In today’s blog, we’ll delve into the crucial aspect of determining the appropriate amount of money to allocate towards marketing.

So, lets get into it.

How much should you spend on marketing? Whether it’s through platforms like Facebook or Google Ads, influencer partnerships, sponsorships, or in-person events, understanding the optimal investment in marketing is essential for driving customer acquisition and revenue growth.

Many businesses mistakenly believe that allocating a significant portion of their budget, such as 20, 30, or even 40%, to marketing is the key to success. However, today’s episode presents a simple formula that provides a clear and accurate way to calculate the amount of money needed to acquire a customer and the total monthly expenditure on marketing.

Throughout this episode you’ll gain valuable insights that could potentially revolutionise your marketing strategies and lead to increased revenue.

Marketing is a necessary expense that involves investing in new customers. Unfortunately, many entrepreneurs overlook this aspect, leading to questions about their revenue generation.

The formula I’m going to introduce you to offers a straightforward approach to determining the optimal amount to spend on acquiring customers and the overall monthly marketing budget.

Unfortunately, many individuals make the mistake of prioritising the cheapest acquisition method or aiming to acquire the maximum number of customers with minimal investment.

However, we firmly believe that this approach is not only ineffective but also detrimental to your business’s long-term success.

Firstly, we need to understand the LTV (life time value) of your customers: We can calculate the LTV by looking at amount of money each customer spends at your business over their lifetime. This metric provides valuable insights into the potential return on investment for your marketing efforts.

An easy way to calculate the LTV is to divide all the revenue you’ve ever made in your business by the number of customers you’ve had.

Let’s say you’ve made £200,000 in revenue and had 100 customers. If you then divide that, my LTV per customer is £2,000. On average, you make £2,000 from each customer.

Some customers will spend more, while others will spend less, but this is an average of £2,000 per customer. This could be because some customers are buying more of your products, returning, or staying longer. If it’s a subscription service or involves upsells, this is factored into the LTV.

The LTV is an average of how much money you make per customer. It’s crucial because it tells you how much you can expect to make from each customer over their lifetime. Knowing this, you can determine how much you need to spend to acquire a new customer.

You need to consider the cost of acquiring a customer, not just ad dollars if you’re running Facebook ads, but also the cost of hiring a marketing person or using a service. If you’re doing it yourself, the cost is simply the amount you spent. For example, if you spent £4,000 to have a booth at a conference and acquired four customers, the cost per customer is £1,000.

If your LTV is £2,000, that’s a good sign; you’ve doubled your initial investment. However, if your LTV is £500, you’ve lost money on acquiring that customer. That’s why understanding your LTV is crucial.

Now, let’s consider the potential return on investment (ROI) of acquiring a customer. Knowing your LTV gives you a clear idea of the amount of wiggle room you have in your budget. As a general guideline, I recommend starting by spending 25% of your LTV on each customer acquisition.

The reason behind this strategy is twofold. Firstly, I have other business expenses to consider, and I want to maximise my scalability. If your LTV is £2,000, you don’t want to spend more than £500 on acquiring a single customer.

Secondly, the lower the customer acquisition cost (CAC), the better. This means you’re getting more profit and value from each customer with minimal investment on your end.

So, the next step is to determine the actual cost of acquiring a customer. Not every marketing channel will yield the same CAC.

For instance, let’s say you run Facebook ads and incur a £10 cost per lead. Assuming a 25% conversion rate, it would cost you £40 to acquire a customer through Facebook ads.

This is why it’s beneficial to experiment with different marketing channels and track the results. By doing so, you can gain a better understanding of the CAC and decide whether to double or triple down on a particular platform of marketing.

Once you have your CAC, it’s essential to align your marketing efforts with your growth goals.

Here is a working example for you to see how it all comes together.

Let’s say your CAC is £50 and you LTV is £2,000.

If you aim to grow and acquire 100 new customers this month, you now understand the amount you need to invest to achieve this goal. Multiply 100 by 50, which represents your Customer Acquisition Cost (CAC) of £5,000.

Next, consider your Lifetime Value (LTV) generation from your 100 new customers. This figure is calculated by multiplying 100 customers by 2,000, indicating that each customer has a potential value of £2,000 over their lifetime. Therefore, you’re willing to invest £5,000 to acquire 100 customers, knowing that each customer will bring in a potential return of £200,000.

Sounds like a good investment to me, 5k in return for 200k.

This calculation helps determine your marketing budget. It’s simply your CAC multiplied by the number of customers you want to acquire. While it’s natural to want to bring in as many customers as possible, it’s important to consider the practical limitations of your business.

You need to consider the following when determining what new customer targets you’re setting for your business.

Do you have the capacity to handle an infinite number of customers?

Can you have robust systems to handle to orders or inquiries?

Don’t break your business with a massive influx of customers, grow and scale over time.

The more customers you bring in, brings more revenue and profits which allow you to invest in more for your business and grow your capacity to take on more customers so you can invest in gaining these customers and continue the cycle.

Setting milestones allows you to gradually increase your customer acquisition goals.

For example, in your first month, you might aim to bring in 100 customers, which is 100 times your CAC of £5,000. This goal is achievable and manageable. Once you reach this milestone, you can then increase your target to 150 customers in the next month.

By reinvesting the profits generated from these marketing efforts and the new customers acquired, you can further increase your target to 200 customers. This gradual approach allows you to identify the areas where your business needs to scale, such as customer service or system capacity, etc.

As you start to see an increase in traffic and potential bottlenecks, you’ll need to prepare for these challenges by upgrading your infrastructure and investing in additional resources.

In summary, to determine your monthly marketing budget, calculate your LTV, CAC, and multiply the number of customers you want to acquire by your CAC. This calculation will give you a clear picture of how much you should invest in marketing each month to achieve your business goals.

The method of acquiring a customer has a limited lifespan. For instance, you might be running a Facebook campaign to funnel customers, and it costs you £50 to acquire one.

That Customer Acquisition Cost (CAC) won’t remain constant forever. It might be acceptable for a week, two, three weeks, or even a month, depending on the market, its saturation, and other factors. Over time you’ll eventually have to adapt and change your approach.

As you tap into a specific niche, market, or audience, your CAC will start to increase. It’ll cost you more to acquire a customer.

It’s not an endless process. You’ll need to pivot and make changes. This could involve altering your campaign, offering, or funnel.

Therefore, it’s crucial to continuously calculate your CAC as it fluctuates and adjust your marketing spending accordingly. Always ensure that your CAC remains reasonable, ideally within 25% of your Lifetime Value (LTV).

The reason behind this is that the CAC will inevitably rise. Even if it increases by 30%, 35%, or 40%, you’ll still be in a comfortable and profitable position.

Marketing is truly magical. We love marketing here at Purple Yak because it comes down to a simple formula at the end of the day. How can I acquire a customer at a cost that makes sense?

How can I ensure that I attract the right customers to buy from me and retain them for as long as possible? It’s all a game at the end of the day, once you realise that it will all become simpler for you and you’ll have a good time with your marketing.

Got a burning question? Reach out on our social channels or email michael@purpleyak.co.uk

Thank you so much for reading.

Take care.