Business owners instinctively know that they should “do something” online to increase awareness of their services. The difficulty is pinpointing how much to budget, what to do, and which metrics are important to inform a marketing strategy. Given that 80% of all purchases today begin with an Internet search, the notion of embracing a digital marketing plan is a correct one. The specifics of what to do may take some trial and error to determine.

Marketing as a Percentage of Sales

 To put a stake in the ground, let’s start with one of the simplest models out there – investing a fixed percentage of top line sales towards spend on marketing.

Global research firm; Gartner conducts the CMO Spend Survey annually. For 2018, the average marketing budget was 11.2% of company revenue. In recent years, Gartner’s breakdown by industry ranged from a low of 4% for Finance to 18% for Education. The survey is based on input from over 600 companies. But with revenues ranging from $500 million to $10 billion, is this survey representative of your business?

The U.S. Small Business Administration recommends companies doing under $5 million a year in sales to target spending 8% of revenue on marketing. While instructive, this guideline makes no adjustment for awareness. For example, there is a difference between a new company with zero brand awareness introducing a new service compared to another company that’s been providing the same service in the same location with large market share for over a decade. Other questions to answer might include what is the split between traditional marketing compared to digital marketing, optimizing for mobile devices or desktops.

There is no one-size fits all strategy. The factors that are most important to you will vary according to the maturity of your business and the competitiveness of your industry, among other elements. Let’s identify other types of data to gather and introduce some additional simple models that will help you better establish marketing goals and calculate an acceptable return on investment.

Breakeven Analysis

 You ought to be able to answer these two questions about your business:

What is a typical sale?

What is the average margin?

Essentially, what is the gross profit you can expect from selling to one additional customer? For example, let’s say you are an auto mechanic charging $50 for an oil change at a 50% margin. In this example, spending $25 in say per-per-click (PPC) marketing to acquire this customer would be a “breakeven” activity since what you gain in margin offsets what you invest in costs.

A more refined analysis would be determining customer life-time value (CLV). Suppose half of oil change customers use your service once without returning. However, suppose you collected all customers’ email. Then you invested in marketing automation to perform email marketing to remind your clients to change their oil. This campaign prompts half of your customers to change oil with you three times a year and stay with you for three years. So, half of your customers are worth $25 – but the other half are now worth 9 * $25 or $225 to you. The average CLV would increase by $100 to $125 (50%*$25 + 50%*$225). The additional $100 of customer value would fund the investment in the marketing automation program.

Your CLV could be even higher if there are other services to sell to your loyal customers. What percentage of repeat oil-change customers might need an alignment or annual inspection from your shop during the next three years? What percentage of those customers might introduce their neighbors to your garage? What this example is meant to illustrate is that some “foot in the door” initial relationship could lead to repeat or add-on sales of other products or services, especially if you have that as a goal and you put into place a system to increase the probability of achieving clear objectives.

The simple case study initially demonstrated that spending $25 on a PPC campaign to acquire an oil change customer was a breakeven activity. This CLV model demonstrates that marketing could be dynamic instead of static.  By having an ongoing dialogue with the customer, the CLV is substantially increased.

Future Posts

It is not realistic to think that a brief article about some marketing parameters could provide a specific answer to the general questions of what type of online marketing should I invest in and how much should I spend? There are marketers who take numerous courses, practice professionally for years, and might sit with you for hours and still might not  be able to determine an exact response for you. The two simple models offered here, marketing as a percentage of revenue and breakeven analysis, are a starting point. Future posts will more fully explore how you could establish a reasonable digital marketing budget and how you might calculate its related costs and benefits. In the next post, we are going to look at keywords, search volume on search engines, cost-per-click bids, click-through rates, conversion rates, search engine optimization (SEO), and extending CLV to further refine how you might approach this opportunity uniquely for your business. In the meantime, do reach out to us with any specific questions you might have about how WSI Vital Marketing can help you better convey your value proposition to your target audience.