Running any business is difficult, but when you’re running a small business, there’s a lot less room for mistakes. One wrong step can put the entire business in jeopardy, and, of course, when you get something just right, it can help get things to the next level quicker than you expected. The key to keeping a small business moving forward is having your priorities in order and reinvesting strategically to keep things growing.
One area where you should be looking to re-invest heavily is marketing. No matter what type of business you’re in, marketing drives everything else. Marketing is what brings you new customers and clients, which bring you the revenue you need to do everything else. The biggest question most new small business owners have is just how much of their budget they should be allocating to marketing.
How Much Should A Small Business Spend On Marketing?
There are lots of variables that go into computing an exact figure, which are going to vary by industry and the exact size of a business. As a general rule of thumb, however, about 10% of a small company’s revenue should be earmarked for reinvestment through marketing — reinvestment being the key word here.
It’s important to understand that marketing is not just another business expense. Every dollar spent on marketing is a dollar invested in new growth. That money has a direct effect on the future of your business. You shouldn’t be looking at how to save some of it. You should be looking at how to spend it more effectively.
Tracking And Measuring ROI
As with any investment, it’s important to track results and measure the return on investment (ROI) that you’re achieving. One of the best tools for tracking marketing results also happens to be free — Google Analytics.
At the most basic level, you want to see where your web traffic is coming from. This will allow you to see which marketing channels are delivering the most for what you’re spending. By digging a little deeper and setting up extra options, you can use conversion tracking to get even more detail about your site visitors and sales.
The Numbers You Need To Know
To really understand what’s working, and why, you’ll need to focus on a few specific numbers. You can use other metrics to help tune things here and there, but the following three numbers will tell you everything you need to know when it comes to figuring out if your current marketing campaigns are worth the money you’re investing in them.
Cost Per Customer
The cost per customer (CPC) is determined by dividing the amount of money you have spent on marketing by the number of customers that marketing produced. So, for example, if you spent $1000 on a marketing campaign that ran for one month and got five new clients as a result, your cost per customer would be $200.
Customer Lifetime Value
Customer lifetime value, or CLV, is the total amount of money you can expect to make from your average customer over their lifetime. If you’re operating a new business, this number might be something you’ll have to estimate. If you’ve been at it for a couple of years, you should be able to calculate a fairly accurate number based on previous customer data. If, for example, your product brings you $250 in revenue each time a sale is made and your average customer buys your product five times, your CLV would be $1,250.
Return On Investment
Once you have your CPC and CLV, figuring out the return on investment per customer is easy. Simply subtract your cost per customer for a given marketing campaign from your customer lifetime value. The result is your return on investment. Using the examples above, you would have a positive ROI of $1,050 per customer ($1,250 CLV – $200 CPC).
You could also calculate the ROI as a percentage of your investment. Again, using the examples above, the investment would be $1000 and the return would be $6,250. So, in this case, the ROI would be 625%. Not a very realistic scenario, perhaps, but you get the idea.
Whichever way you decide to look at the ROI, the point is, of course, to have a positive number. As long as your ROI is positive, your marketing is helping you company to grow and you’re on the right track. If your ROI is in the red, it’s time to take a step back and rethink your marketing strategies.
Having trouble deciding on the right budget for your marketing? Or where to put your marketing dollars? Get in touch today and we’ll be glad to help you find the solution that’s right for your business.