How Much Should You Spend On Marketing in 2021?
The year 2021 is now 3 months old. And one question that every businessman and entrepreneur asks is: “How much should I spend on my marketing in 2021?”
And we decided to give you a crystal clear answer instead of a hazy diplomatic one. See… marketing is an important expenditure in the 21st-century business as good content is never going to find its audience itself. So how much should you spend on your marketing budget?
For already established businesses, we recommend using 10 percent of the revenue that the business made in the previous year. Your marketing budget for 2021 should be $10,000 if you made a profit of $100,000 last year.
Something doesn’t feel right by calculating the marketing budget this way, it certainly limits your potential. What if you can invest $20,000, $30,000, or even $50,000 in your marketing and that leads to a 10x growth? While this may be risky, we’re going to show you how to play safe by scaling a small business marketing budget.
Formula To Calculate How Much Should You Spend On Marketing
So let’s dive in by just giving the formula that we like to use for marketing budgets. But before that, you need to understand CAC. CAC stands for Customer Acquisition Cost and a lot of this post is going to focus on how to determine your maximum customer acquisition cost.
You can accomplish the right marketing budget by answering some questions. By answering these questions, you can forecast the right marketing budget for your business in the year 2021.
4 Questions That Help Business To Calculate Marketing Budget
Question #1: How much time do you give to your business?
You must ask yourself this important question because if your time is limited then you’re going to need to hire people to do this for you. Hiring someone might be your first expense.
Talking about hiring, you have 3 options. You can hire an employee part-time or full-time. You can also hire an expert with 1-3 years of experience in marketing.
Also, you can outsource your digital marketing work to digital marketing service providers. You can hire a contractor or freelancer, whose prices can vary, but in general, you’re going to need to spend about $50/hour for someone good.
There are advantages and disadvantages to each option.
For instance, hiring freelancers backfires if they could end up not showing up or prioritizing your work. If you hire an employee, you could spend too much time on administration or training.
If you are planning to do a digital marketing strategy yourself just make sure you are using your time wisely because there could be a significant opportunity cost of you doing this. Also, you end up saving the cash outflow.
Question #2: What is the LTV (LifeTime Value) of your customer?
LTV means Life Time Value which is the sum of revenue (or value) a business receives from customers over a lifetime. This is critical to know because LTV will ultimately determine how you can scale your marketing budget.
higher LTV means you need to invest in marketing to grow fast.
Look at the formula like this.
If your business LTV is $100 and you are expecting a profit of $20, then the maximum CAC is $80.
However, if you have new companies who have enough financial backing that they can sustain a loss to acquire customers. For example, the max CAC = LTV – Profitability, thus, LTV $100 means you can handle a loss of $20.
And there’s a famous quote about marketing which reads: “The business that can spend the most to acquire a customer – wins.”
Question #3: What is your forecasted AOV?
Now, the Average Order Value is the average price your customer pays for the service or product offered by you. So, if you have one product that is priced at $200 then your AOV is $200.
If you have multiple products and services then getting your AOV requires a little bit more work. The most effective way to calculate AOV is by looking at the historical data. For an established company, AOV is calculated by dividing the business’s total revenue by the business’s total clients.
If you are setting up your business, then try forecasting which products/services will have the most demand and calculate an AOV based on that. You can always adjust your forecast depending on the data.
Question #4: How frequently customers buy from you?
What is the expected usage of your product/service that you offer? Will it be a one-time purchase without cross-selling like a stationary bike? Is it a monthly service/product that will recur every month like our internet marketing services?
Is this a product with a high usage rate and needs to be reordered like toiletry or food? Answering these questions will help you to analyze LTV. The frequency of the customers is proportionately related to the business’s LTV.
Take the example of Facebook. Facebook’s main goal is to make users stay and come back all the time instead of just people visiting the website.
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