How Much Should You Spend on Marketing?

This is one of the most frequently asked questions I get.

Someone recently shared that they had talked to marketing companies quoting $2,000 to $4,000 per month. Is that too much? Believe it or not, there is actually a correct answer. It just depends on numbers you already have sitting in your business.

Here is how to work it out.

My First Rule of Marketing

If I helped you start your business, you have heard me say this one. Don't spend money on things you can't track. You need to know if your marketing is working.

Business owners get swarmed with companies offering to show your ad on their website, in their brochure, on their whatever. These are rarely good investments. If you want to support these causes out of goodwill, go ahead, but call it a donation, not marketing.

Step One: Know Your LTV

LTV stands for lifetime value of a customer. Some businesses have a one time relationship with a customer, a vasectomy doctor or a divorce attorney for example, and can calculate LTV easily by adding up what the customer spends.

Many businesses hope for repeat customers. My law firm wants to see your business succeed for the long haul, so we have to estimate. It is fine to make an educated guess and reassess over time.

Step Two: Decide What You Can Afford to Pay for a Customer

Use the consultant, with an LTV of $5,400. Would spending $540 to get one customer be too much? Probably not. That number is your customer acquisition cost, or CAC.

Notice that this has nothing to do with what a marketing company charges. It comes out of your own numbers. Once you know it, a $3,000 monthly quote stops being a gut feeling and becomes a math question.

Step Three: Count How Many Frogs You Have to Kiss

Some of you land every customer who calls. Most don't, so track it. For me, new customers schedule appointments, so I check how many I booked against how many became clients. A great month converts 1 in 4, about 25 percent. A tough month is 1 in 6, about 17 percent. For this example we will assume 1 in 5, or 20 percent.

If you are not tracking this yet, start this week. It is the number most owners are missing, and every calculation after this one depends on it.

Step Four: Now You Know Your Cost Per Lead

If the consultant can spend $540 per customer and it takes 5 leads to get one, then $540 divided by 5 is $108 per lead. That is the most you should pay for a lead.

Any marketing channel that delivers leads under that number is worth keeping. Anything over it is losing you money, no matter how good the pitch sounded.

Step Five: Build the Monthly Budget

Say the consultant needs 20 paying customers per month. Here is the whole calculation, start to finish.

Run the same steps at any size and it still works. A crafter who makes $20 of profit per sale and will spend $5 per sale to get it, and who wants $1,000 of profit per month, needs 50 customers and can spend $250 per month to get them. A home builder who makes $200,000 of profit per customer and wants 5 homes per year, which is $1 million of profit, can spend up to $30,000 per home. That is $150,000 per year, which might break down as $40,000 for events, $60,000 for lead generation, and $4,000 per month for general marketing.

Before you plug in your own numbers, make sure your prices actually leave room for a marketing budget. If they don't, start with how to set a price for a product or service instead. No amount of advertising fixes a price that is too low.

The Takeaway

So was the $2,000 to $4,000 per month quote too much? For the consultant in this example, no, it is well under budget. For the crafter, it would be a disaster. Same quote, completely different answer, and the only way to know which one you are is to run your own numbers.

If you are not tracking or estimating your business's health metrics, you need to start. Lifetime value, conversion rate, and cost per lead are the three that tell you almost everything about whether your marketing is working.

If you want help with this, reach out. When you are a Momentum member, you get unlimited question and answer support by email, so you can send me your numbers and we will check the math together. Learn about the Momentum membership, or book a free consultation and we will start with what you already know about your customers.