Branding Made Simple

As a small business owner, you’ve probably wrestled with this very important question: “How much do I spend on marketing for my business?”

What you will discover may surprise you and have a huge impact on how and where you decide to spend money. As a small business, be prepared to actually lose money on first-time orders.

“Wait,” you say. “If it’s costing me money to get customers, then how do I make money? I can’t afford to make a huge investment right now.”

The key is in the formula. Return on Investment (ROI) isn’t just what you make on the first sale. Even though a business may lose money initially, research has shown that most businesses make money over the average lifetime of a client. Yet, the formula we are talking about can be applied to any industry. Because if you don’t know how much your customer is worth, you won’t know how much to spend.

The formula for calculating how much a customer is worth is a great start to establishing a marketing budget. But creating a marketing budget shouldn’t be based on whether you have any extra money laying around. It’s about truly knowing your customer acquisition costs.

For example, let’s say your business made $50,000 last year. How much more do you want to make this year? This answer is crucial to deciding how much money to set aside for your marketing. Let’s say you want to make $25,000 more this year. And in this example, you have determined that an average customer is worth $500 a year in gross sales. In this case, this might mean $250 in net profit for your business. Divide the extra profit you want next year ($25,000) by the profit per customer ($250), and that gives you 100. That means you need 100 new customers to make $25,000 in extra profit.

CUSTOMER ACQUISITION COSTS

Now that you know how many new customers you need to make $25,000 in extra profit, let’s figure out how much it will cost to generate a new lead and what percentage of these new leads will turn out to be new customers.

Let’s say you invested $5,000 in a website, email marketing campaign, and social media. All of these efforts produced 25 new leads a month and you closed 50% of them.

25 x 12 =  300 new leads
300 x .50 = 150 new leads closed per year

So, take the $5,000 you invested in marketing and divide by the number of new customers (150) and you get $33.

$5,000 / 150 new leads = $33

This is your new customer acquisition cost. (The goal here is to not spend more on acquiring a customer than what a new customer is worth per year.) Essentially, you spent $33 to get $250. Not bad. What’s even better is that you made $37,500 more per year, a 30% increase from your original goal! (Note: Your new customer acquisition cost remains the same even if you decide to spend less for marketing. Spending less means you receive less in profits. See chart below)

Business Profit in Relation to New Customer Acquisition Costs

In our eBook, "What's a Customer Worth: Determining Your Marketing Budget in Challenging Economic Times", we outline several different industries and provide estimates on how much a customer is worth in gross sales.