Are you Spending Too Much or Too Little on Advertising?

advertising budget

Today’s topic is all around the amount of money you should be investing in your marketing or advertising campaigns.

I’ve done a couple of episodes around kind of budgeting for marketing. When I’m referring to marketing, I’m referring to marketing, advertising, paid media, and anything that relates to gaining customers, retaining customers, and getting your brand out there.

There’s been a lot of different formulas that I’ve presented. I’m going to talk a little bit about those today, but I’m going to give you some insights based on where things are going in the economy now. By no means am I an economist, but what I do study is human behavior, human attention — where that attention is going. Are businesses pulling back? Are they scaling up in marketing so I’m able to study all of that and start to really spot some interesting trends that I do believe you can capitalize on?

The first thing that I recommend is to have some kind of formula that you use religiously to track and invest your marketing dollars. After testing lots of different formulas, what I have found works the best, and again this is not a one size fits all, is to take a percentage of your gross sales for the projected quarter, then reflect back on the quarter and update for the coming quarter as you see fit.

I’m just going to use very simple math. Let’s say your business is doing $100,000 a month of gross sales and you’re just going to forecast $100,000 every month. From there you want to pick a percentage that makes sense. Now I will tell you that in all honesty, any number that you typically tell me you’re investing in marketing unless you’re a b2c e-commerce-driven brand that solely lives or dies based on your marketing, you’re most likely under-investing. I also am a realist and know that if you’ve been investing 2%, for example, it’s going to be very challenging for you to all of a sudden jump to 8% or 10%.

I’m just encouraging you to bump up whatever you’ve been doing by a percent or two and then to continue to watch the effects. But in this example, for simple math purposes, I will say that you’re investing 10% of your gross sales in marketing, which is a great number. So you’d be investing $10,000 a month or $30,000 for the quarter. So after the quarter finished, you would basically look back and say, “All right, so we were forecasting to do $300,000 in sales. Where did we wind up?”

If you wound up on the short end of the stick, and let’s say you only did $200,000, you’re then going to adjust your marketing budget down based on the performance.

On the flip side, if you ended up doing better than you had forecasted, and let’s say you ended up doing half a million dollars instead of 300,000, then your marketing budget would go from $30,000 a quarter, all the way up to $50,000 for the next quarter. These budgets need to be a moving target so that you don’t back yourself into a very difficult corner.

Now, there are other variables at play. If you’ve got seasonality, you’re going to need to continue to play with those numbers. If you have a gigantic month, for example, so there are ways to kind of play with that, but the whole goal is that you start to establish a routine. You start to a habit where your marketing compounds.

You’re continuing to execute month after month, and you’re getting your brand out there, you’re trying new tactics, and you’re continuing to execute tactics that are working on a regular basis. What you can do is you want to start to nail down that secret or that magical number. I will tell you that this magical number takes a little bit of work.

However, once you get to that number, it can be game over in a good way. You’re aiming to figure out how much it costs you to acquire a new customer. So, if I’m investing $30,000 a quarter going back to that example, $10,000 a month, I want to be able to quickly see how many leads and I’m using leads in a general turn whether you’re b2b, b2c, e-commerce-driven retail, it doesn’t matter. So how many people are raising their hands that they’re interested in working with you? That’s metric number one. Metric number two then is your conversion percentage — how many of those ended up converting into a customer.

If you invest $10,000, simple math, let’s say you end up getting 10 new customers. So, your cost per sale or your cost to acquire a new customer was $1,000. Now, depending on your business, that could be a horrible number or an amazing number. And what you’re looking to do is continue to then improve those numbers. You’re looking to lower your cost per lead, you’re looking to improve your conversions, which then drives down your cost per sale. And if that thousand number is a great number, what you want to start to do then is really remove the limits.

While a percentage is great if you say, “Michael, I just want to grow.” Well, what happens if you were to invest $20,000 for that particular month? Would you end up getting 20 new customers? Can you still maintain that thousand dollar number and what you’re aiming to start to figure out is kind of the sweet spot of how many new customers can you acquire? The name of the game is “whoever is willing to invest the most to acquire a new customer wins”. That number is the secret sauce number. What can you afford to invest to acquire that new customer? And where a lot of businesses have narrow-minded thinking is they forget about another key metric that matters: the lifetime value of a customer.

You might only get, let’s say, it does cost you that thousand dollars. You may say, “Well, geez, Michael, I invested $1,000. But the initial sale was only $200. So I’m out 800.”

Well, how many times are they going to purchase and repurchase? How many people are they going to potentially refer to you and your business? The lifetime value of that customer could be $10,000. So that is just managing your cash flow and your numbers to see, again, how much can you afford to invest to acquire those customers to continue to grab all of that lifetime value revenue in the near future?

So if you were to say, “Michael, am I investing enough?” The answer is usually no. And the trends that I’m seeing now is that there are a lot of people that are scaling back on their marketing budgets. When I see that, that signals to me that it’s the absolute perfect time for me to double down and scale-up. Because that means that traffic is a little less expensive to buy, eyeballs are less expensive to achieve and you can get your brand out there for smaller investments.

So I want you to continue to remain the course and invest in marketing because the next three to six months are really going to determine if you make or break it. Hope you enjoyed today’s episode. Have a wonderful rest of your day and I will see you back here tomorrow.

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