Money: How Much Money Should You Spend On Marketing, And Can You Track the Return On Investment?
Industry writers suggest spending an average of 5-10% on your marketing efforts. This includes advertising—TV, radio, social media ads, etc. —but isn’t limited to that. Other types marketing include networking, customer service, publicity, market research, video for your website, etc. It comes down to the details, for example, how the phone is answered, and can be as broad as an overall campaign that covers a year or more of marketing strategy.1
Another option to calculate how much to spend on advertising (the print, online ads that you do along with commercials) is to take 10% and 12% of your annual gross sales and multiply each calculation by the markup made on your average transaction. To calculate markup, divide gross profits by hard costs. Deduct your annual rent (or mortgage) from the 10% and 12% numbers, and that will give you the range to spend on your ads.2
Here are some questions to ask yourself while making a decision about how much to spend:
- How much do we want to make this year?
- How much improvement does our bottom line need over last year?
- Will we lose money, customers, clients if we don’t do anything? If so, how much will that cost us?
- Are there areas of our marketing that are working?
- Are there areas that need a boost?
- What areas don’t we do at all?
John Wanamaker once said “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”3 This can be disconcerting, especially when asked to spend 5-10% of revenues on marketing. However, remember:
- Advertising—print, social media, outdoor, commercials, etc.— is only one part of marketing. Others include:
- There are a variety of ways to measure the return on advertising:
- Set up a unique phone number to call in a print ad, or create a unique URL for an online landing page. Then you’ll know which media is being seen and used to contact your company.
- In addition, make sure that everyone who has contact with clients and customers asks them how they heard about your company. A simple form, printed or digital, can be used to track this information.
As you track the sales generated by your marketing campaign, you can use the numbers to do a revenue to cost ratio, which is incremental revenue driven by a marketing campaign divided by the cost.4 For example, if it costs $1200 to run a pay-per-click ad campaign, and the campaign reaches 45,000 people, and 5 of those people become customers, spending an average of $1500 each on what your business offers, the revenue to cost ratio is 6.25x. 5x is considered a good return, 10x is excellent.
When considering the marketing for your company, and how much to spend, it’s important to have a plan. I often hear things like: “We spent $XX on newspaper ads and didn’t get any business from it”. Remember that it takes repeated messages to see results. With a plan, you can decide which media to use and how much to spend in each area.
Writing your own plan can be an option if you’re a small business on a tight budget and have some industry know-how, or you can hire someone to write it for you and work through the details. Having someone who’s experienced and knowledgeable to guide you can make all the difference in your efforts.
Once the plan is put together, the budget committed, and the marketing started, the fun begins. And that’s learning about what’s working, what isn’t and why. And, experiencing the rewards through what IS working. That’s exciting!
Other sources for the 7 Ms of Marketing: