Social Media is free!
If you’re a marketing director you probably brush that statement off as ridiculaously incomplete. You know that social media, for example, is only free if you have employees (or agencies) with expertise willing to show up for work and not take a paycheck. The same is true with all web marketing – there is a cost involved.
Since one way or another there are costs to running a successful web marketing strategy, as a marketer you need to effectively develop and manage a marketing budget. A budget is really just an intentional plan.
Here’s a helpful guide to get you started with a web marketing budget.
Determine the Cost Per Acquisition (CPA)
While this is one of the most important and easiest to calculate metrics, often companies simply have no idea what their cost per client (or customer) acquisition is. Without knowing your cost per acquisition it’s very difficult to make marketing decisions.
First, calculate all of your spending on marketing (ex: January – October). Make sure to include both direct marketing costs (such as pay-per-click) and indirect costs (such as website design). Make sure that you’re including all marketing costs, even salaries and contractor payments. As long as your company includes more than one person to get the marketing work done, assign a dollar amount to absolutely every activity. Nothing is free.
Then calculate the total number of new clients you acquired in that same time period. Finally divide the total marketing costs by the number of new clients in that period.
Cost Per Acquisition (CPA) = Total Marketing Costs / New Clients
Determine the Yearly Value of a Client
Now we need to calculate how much (in revenue) a new client is worth to us.
To get this number, take a decent number of your most recent clients which are 12 or more months old, total the revenue of each client, and divide by the number of new clients. The number of clients you include in the average depends on the volume of clients you have a year.
While you’re at it, it can be helpful to determine the Lifetime Value of a Client and not just one-year value, though we’ll focus on the one-year value.
Year Value of a Client = Average Revenue of a Client in 12 Months
Determine Your Acceptable Margin
So by now we know how much we’re currently spending to acquire a new client and we know how much each new client is worth to the bottom line each year. With this information we can define our current marketing margin.
For example, if we’re spending $200 to acquire a new client and our Yearly Value of a Client is $1,000, our marketing margin would be 20%.
The key now is to define an acceptable marketing budget margin. Factors which should be taken into account include:
- Gross margin of the product/service you’re providing. If your gross margin for your product is only 20% (example $80 costs for a $100 product) then having 20% marketing costs will not leave room for any profit, let alone operating costs, etc (in this case you may need to make sure the business model is solid). But if your gross margin for your product is a healthier 75% then a 20% marketing margin would be reasonable.
- Timing and strategy of the business. If the current goal of the company is to rapidly expand your customer base, you may be willing to sacrifice some profit and have a higher than normal marketing margin. Or if the company is wanting to keep the customer base relatively static, you may have the goal of reducing the marketing margin in order to increase profits, while still marketing enough to replace any outgoing customers.
If you’re a marketing director, these should be open discussions with the company leadership until these numbers can be defined. You can’t do your job as a marketer without knowing what you’re going after and what you have to work with.
Set Your Client Acquisition Goal
Now it’s time to set goals (that’s the fun part in my opinion). This may start as a revenue goal or a new client goal, but since we know our yearly value of a client, we can get a client goal even from a revenue goal.
We now know how much we need to plan on spending in order reach our goals. If our Cost Per Acquisition is $600 and we want to get 20 new clients a month, we know we need to intentionally spend $12,000 / month. Of course the goal is not spending money but rather new clients, but this is an important starting point. From here if you find that you don’t have the budget for $12,000 / month (in this example) then something has to change. This is an important realization as otherwise you will just be kidding yourself trying to get a return which isn’t feasible with the resources available.
Track Your Spending
Now it’s time to track every single dollar which you’re spending on web marketing and, when possible, associate returns directly with the spending. I recommend creating a spreadsheet with a column for each spend category (ex: Website Design, Search Engine Optimization (SEO), Pay-Per-Click, etc) and a row for each month of the year. Then stay on it at minimum monthly.
Did you miss a month of Pay-Per-Click or Search Engine Optimization (SEO)? Then your results are going to be directly impacted. It’s not about spending the money of course, it’s about the return on that money being spent. If it’s not brining a return you shouldn’t be spending the money on it, but if it is brining a return, you need to be consistent with it.
Optimize Your Web Marketing Budget
Earlier we defined your Cost Per Acquisition and it’s important to keep measuring this number. This is a number you want to optimize – you want to do what we can to make it lower! You want to get more return for every dollar you’re spending on marketing.
As you regularly evaluate your spending and the returns, you want to work with your team to continually get a greater return on investment (ROI). If you’re just now getting intentional about your marketing budget, this will be especially important in the first few months, but you’ll want to stay on this to always strive to get better.
Continually looking for new technologies and methods of reaching your target market will play a major role as well in optimizing your cost per acquisition.
- Determine the Cost Per Acquisition (CPA)
- Determine the Yearly Value of a Client
- Determine Your Acceptable Margin
- Set Your Client Acquisition Goal
- Track Your Spending
- Optimize Your Budget
It’s next to impossible for a marketing director to be successful in web marketing without having an intentional marketing budget. Without a marketing budget the marketing is left to random whims (gasp).
Remember that it’s not about spending money, it’s about getting results.