The most common question that I get from business owners is “how much should I spend on marketing?” Some owners are shocked at the answer that I give them.
My first question back to them is “what is your revenue goal?” Having a top line goal gives a starting point to calculate all budgetary items, not just marketing. Next, business owners need to know and understand three important metrics, customer acquisition cost (CAC), revenue per customer (RPC), and marketing costs as a percentage of total revenue.
Every business is different, so these metrics vary, even for businesses in the same industry. If a business has been spending money on marketing, CAC can easily be calculated by taking the total sales/marketing expense and dividing it by the total number of customers. RPC can be easily calculated by taking total revenue and dividing by the number of customers.
Understanding the relationship between CAC and RPC is crucial to making good marketing decisions. If the CAC is greater than the RPC, then the business needs to evaluate its marketing strategy and try to reduce CAC or increase RPC. For instance, if the business has repeat customers, the marketing messaging needs to be directed at past customers to get them to keep coming back. Typically it is cheaper to keep a repeat customer who has a good buying experience than to acquire a new customer. In this case, CAC goes down RPC goes up.
So if these metrics are tracked and there is a revenue goal in place, the marketing budget should be CAC/RPC x revenue goal. So what if these metrics aren’t tracked? How does a business determine their marketing budget? My answer is to benchmark what successful businesses are spending on their marketing.
Deloitte conducts a biannual survey of marketing executives at top companies in the United States. According the February 2020 survey, these companies marketing spend averages 8.6% of total revenues. I encourage you to read through the report, as it has a lot of good information. My answer to my clients is you should be spending 5% to 10% of the revenue goal on marketing and sales efforts.
Many business owners are surprised at the answer and realize that they are not spending enough, but acquiring new customers and retaining existing customers is what marketing is all about.