Thu, Jan

Do the marketing math

Charlotte Graham-Cumming is a director at Ice Blue Sky, an inbound content marketing agency. She works with CMOs and business owners to help them develop marketing strategies, brand positioning and making the shift to inbound marketing. Here she provides tips on how to best allocate your marketing budget.

Marketing can seem like a black art, and deciding what you should be spending on marketing is often an exercise in sticking fingers in the air, the closing of eyes and vainly hoping for the best. As Henry Ford famously said: “Half of every dollar spent on marketing is wasted, I just don’t know which half.”

Charlotte Graham-Cumming of marketing agency Ice Blue Sky says she is often asked the question: “How much should my marketing budget be?”. Here answer: “How are you currently making that decision?”. The reason: “It tells me whether the link between planning and results is really there”. Here she helps guide you from one to the other.

1. Sort out what you want

The first step is to know what goals you have in mind for your business. What revenue you want to achieve, how much will come from existing customers and contracts, and how much you need from net new customers. Not doing this is like starting a race but not knowing how long it is, or what the route is.

Then, work out how much of each of those sales targets is going to come from marketing, assuming sales will generate leads, and a certain amount will come from referrals.

2. Sort out what your customers want

Write down your buying process, based around your ideal customer. Look at all the touch points that occurred, and how they link together. Work out your cost of sale that’s needed to meet the needs of a buying customer.

3. Know your worth

What is your typical average sale price? If your ‘per job’ prices fluctuate wildly, then perhaps look at working out your annual customer revenue. It’s worth spending the time to do this, especially in combination with the cost of sale calculation, so that you can accurately work out how many individual sales will make up your growth target.

4. Learn from the past

Add up everything you’ve spent on marketing, across the whole year, for the last three years (if possible). Look at what results you got from your marketing activity, and see if you can trace back new customers to marketing activities.

For the last 12 months, look at your proposal close rate. It’s ideal if you can do this across different stages - for example, how many quotes that you produce convert into sales? Work out the ratio of the close, and document how you define that. For example, if you decide to work out the close ratio from ‘initial enquiry’ as opposed to ‘produced quote’ your ratio will be a lot higher.

Once you have this number, make it clear which of these your marketing should be achieving. Should marketing deliver initial enquiries, or actual quote requests - this distinction is critical.

And finally, just before you get fed up with numbers, look at how much business sales typically generates, and what comes in through client and partner referrals.

5. Be good at maths

Are you sitting comfortably? Now, let’s do some maths. I have 12 pineapples in one hand, and six bananas in another, what do I have? Correct, enormous hands. That aside (and for the record, my hands are fairly normal sized), you need to calculate how many ‘deals’ you need to win to make your sales targets.

Remember to only include those deals you want marketing to achieve, for example:

a) Total revenue goal - £500,000

b) Revenue from existing contracts - £375,000

c) New revenue from sales/referrals - £62,500

d) New revenue that marketing needs to deliver - £62,500

So what we see from the above is that marketing in this case needs to generate enough interest to in turn generate £62,500 worth of revenue (d). The next example shows you how you use this information to calculate how that rolls up into how many leads marketing should be generating:

aa) Marketing generated revenue (number for the previous table) - £62,500

bb) Average sale price (or average annual customer revenue, whichever is most relevant to your business) - £12,225

cc) Number of deals marketing needs to generate (this is dividing the marketing generated revenue target (aa) by the average sale price (bb). Round up or down as needed) – say 5

dd) Number of leads required to generate those deals (this uses the ratio defined in point 4. In this example we’ve assumed that marketing is responsible for generating ‘interested leads’ which means they have to respond to your marketing in some way, and we have assumed 12:1 close rate in this example) – so 60

6. Understand your tolerances

Now you have how many leads marketing is expected to achieve over the next 12 months (25), you can start to work out what level of marketing activity (and therefore your budget) is needed to achieve those results.

To do that, you need to go back to your workings in point 2, and revisit your average sales price.

Subtracting the cost of sale from the average sales price gives you a very rough gross profit. If you want, you can take this further in terms of how you work out the cost against individual sales.

This calculation helps you look at what your ‘cost per lead’ should look like. How many marketing pounds/dollars/euros are you happy to spend in order to win a new customer? For example:

Average sale price: £12,225

Average cost of sale: £2,445 (20%)

Marketing cost per lead: £125 (this is low, as we are classing leads as high ratio)

This is just an example of how you might structure it, but the first time you do this, it’s perfectly fine to go with what you think you can tolerate (emotionally and rationally).

Don’t be tempted to go too low, think rationally about how much it really costs you to generate leads. If it helps, you can work out what it costs you in time for your sales guys to generate a lead, from the initial call to the first meeting. This may be a useful guide.

7. Step into the beyond

The next bit is nice and simple, multiply your marketing cost per lead by the number of leads needed to get that number of deals you need:

£125 x 60 = £7,500

8. Work out your return

Now, combine the last few numbers to work out your return from your marketing spend:

Revenue gained (minimum) £62,500

Marketing spend: £7,500

Cost of sale (for those that closed, i.e. 5): £12,225

Marketing ROI (A minus B minus C): £42,775

9. Before you go….

Bear in mind this is a completely fictional example, and I’ve deliberately kept the maths simple to make it easy to demonstrate the points so that you can use the framework for your own business. Don’t be tempted to think about whether or not a £7,500 marketing budget is realistic for a revenue goal of £500k, as that’s not the point of this exercise.

The business above assumes a regular recurring revenue, which could come from service lines such as Web-to-print, where you get subscription or click revenues for example, so the requirement for net new business is lower than perhaps another type of company.

Whichever your business model, you need to get your head around all of the business levers discussed before you get started, to ensure you do come up with the most appropriate budget (and marketing plan) based on what you’re trying to achieve.

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