How much should I spend on marketing?

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Hello there. In this video, I'm going to answer the number one question I'm asked by entrepreneurs, which is how much should I spend on marketing? It's a simple enough question. Yet so many businesses get it wrong. And of course, the repercussions of getting it wrong could be catastrophic. It could actually make or break your business. 

Now, I'm Paul. If you haven't met me before I’m a CFO, I'm an accountant. I'm an entrepreneur. And I've got over 25 years of experience in helping businesses to grow profitably. Now, if that sounds interesting, do me a favor and click the subscribe button below.I post videos every week and I'd love to be able to share those with you.

Okay, let's get back to the big question. How much to spend on marketing? Well, when preparing for this video, I thought I’d have a quick Google because I always like to see what else is out there. And I've got some really interesting answers. I saw some people saying you should be spending between 2 to 5% of your sales on marketing. Some people are saying I should be spending 10 to 20% of my sales on marketing. Other people said I should be spending 30% of my profits on marketing. Others say I shouldn't be spending anything at all. I should be doing it all by word of mouth because I'll make more money. There's a whole load of answers out there.

And I have to tell you, in my humble opinion, most of those are rubbish. If you want to know how much to spend on marketing, it varies for every single business. And so therefore a number in itself isn't helpful. All you need, though, is one very simple formula, and I'm going to teach you this formula right now, which you'll be able to put into practice straightaway.

Okay, I’ve brought my trusty flipchart here. So let's go through the formula. So what we've got is that the marketing cost should be less than Sales. Sales? NO! Actually, the cost of marketing should be less than the profit. The reason I put sales on there is because that's an equation that I hear all the time. BUT, if you relate your marketing costs to how much you're selling, that's going to give you a false impression of how much to spend because actually it doesn't really matter what the sales are. 

Sales in many ways is a meaningless number and what's most important is how much profit you're making - how much cash is left in the bank.

So what I suggest is the formula you need to follow is that the marketing costs need to be less than the profit you're making. Now, that makes sense. That makes a lot of sense. Let’s break this down a little bit further. Actually, when I say marketing costs, I think it's even more helpful to say the marketing cost per unit should be less than the profit per unit that you're making.

Now, I don't care if you're selling goods or services, this equation works for both. But by focusing on what you're making per unit, you're going to get a much better handle on your profitability. And also make it much easier to understand how much you should be spending on marketing. 

Okay. So before we go any farther, here's a quick question. How many of you out there actually know how much profit per unit you're making? Is it something that you guys look at every month? 

We're going to break down these formulas a bit more. But it all means you just need to know how many items or whatever it is you happen to be selling in a particular period. I would suggest probably a month. Okay. So let's break this formula down a bit further and as I say it's a very simple formula. And if you just remember this, your marketing, your marketing plans are going to be much better. But let's break this down a bit more. Okay? Marketing costs. Now, what do you mean by marketing costs? I mean, it sounds quite straightforward, but actually, if you think about it, quite a lot of people in business, including myself, spend our marketing dollars in several different ways.

You might be running advertising campaigns on say, Facebook or Google. You might be doing old school print campaigns, you might be doing PR, you might be paying a fixed monthly retainer to a marketing agency to do a load of stuff for you, including posting on social media or whatever it might be. And so therefore, the marketing number you look at, it's not necessarily particularly easy to work out.

However, I would suggest for the purposes of working out how much to spend on a marketing campaign, you should think of taking into account just the direct marketing costs, and that's the costs that vary directly in proportion to running that campaign. So that might be Facebook, spend, Google, spend, those kinds of variable amounts. So that's an amount per unit you should be looking at.

Let’s say the total amount you're going to be spending on Google ads, maybe in a month is $1,000 and let’s say you can you're going to sell 500 items. That's going to give you a marketing cost per unit of $2 per unit.

Okay. So that's the marketing side. So for this equation to work and for you to be making money, if it's costing you $2 in marketing to get to sale, you have to be making a profit of at least $2 per sale. If you're making less, you're going to lose money and ideally you'd be making a hell of a lot more.

So let's think about profit per unit, because if you've not looked at it before, it can be a little bit confusing as to what to include, because as a business we have millions of different costs so which ones do you take into account? So what I'm going to suggest here is the following. Let's say you might be getting  $10 for an item you've sold and you're going to take off what's called the direct or variable costs. So the direct costs are the costs directly associated with making that sale. So it could be we're selling a widget, we've got $10 for a widget. Let's say that widget costs us $4. Okay, So I need to take off $4, let's say, plus card processing fees. And perhaps this is something that you sold on your website. You're going to have to ship it out to somebody. Well, perhaps the shipping on that is let's just say that's $2, right? 

So in this example, my profit per unit, sometimes it's known as gross profit if you've heard that number, it's exactly the same thing. In this case, we're going to be making $3 per unit. So in this example, we can see that if we spend $2 today, we're going to get $3 back. So that's not a bad equation, is it? You know full well that you can't really spend much more on this. If you spend three here, you're going to be breaking even. If you spend more than that, you're making a loss. 

But most people don't even do this math before they run the campaign. And that's really the starting point. Okay. You need to know how much profit per unit you're making. And this as I  say works for people selling goods and services. But it's a really good way to get your head around the numbers. In an ideal world, obviously you're going to want to get this number (marketing) as low as possible and you're going to want to get this number (profit) as high as possible.

Something I would also say is that quite often people run marketing campaigns in conjunction with running a promotion because it makes perfect sense. Come to my site and I'll give you 20% off. Okay, well, let's say we did that initially. In this case. If I was going to give 20% off my $10, okay, I'm going to be taking $2 off. In that case I'm actually only making $1. So if I run my promotion and it's going to cost me $2 to get a customer and I'm going to give them 20% off, I'm losing money on every sale, I'm going to spend $2 and get a dollar back. So that really focuses the mind.

I'm not saying don't do a discount or promotion, but I am saying is, why don't you work this out first? You can then see how much leeway you've got to play with. Does that make sense? 

There are a couple other things that are worth thinking about when we look at this formula.

The first is demand and seasonality. So what do I mean by that? Well, what I mean is most businesses do have an element of seasonality. So there's certain times of the year when customers are going to be right in the market to buy your products. And there's other times of the year when they're going to be less likely to buy your products or services, and you need to take that into account when you're planning your marketing campaigns. And also you should take into account how much you think you need to spend on a campaign.

Because if you think about it, if there's high demand for your products or services, such as in the run up to the holidays (if you're selling gifts), then you should you should be spending less on marketing because there's more people out there who are already primed and looking to buy so it should be easier to convert those customers to get those people to paying customers, right?

Whereas perhaps, if you're a gift retailer and it's January (straight after Christmas),sales aside, you're going to find it very difficult to get that customer to buy. So you might need to spend more on marketing to get a customer in January than you might do in December. And that's worth thinking about.

So what I suggest you really need to do is plan your campaigns for the next few months in advance and come up with a target for how much you're prepared to spend in the different months of the year, taking this into account. 

Okay, So that's demand. The other thing I want to think about is repeat business. Now I glossed over this and I don't know if you noticed, but this formula is basically looking at one sale or one order. Okay. What happens if my customer comes back and buys several times in the year? Then surely you’re thinking, Paul, this equation doesn't work because you're trying to justify a marketing spend on the basis of one sale, which may not be right for your business. And of course, if you thought that, you raise an excellent point. But I'm going to say a couple of things here. 

As a concept, you should try as far as possible to make a profit on the first sale. It's not always possible, but if you can, that should be your goal. Why do I say that? Because the first sale is a cert. You've all got that money, but repeat business is much more variable, it's more risky. You may or may not get it. So if you can make your marketing campaign pay for itself within the first month, that's the place to start.

However, if you can't, but you've got good levels of repeat business and that's well worth taking into account. And I'll give you an example here. I used to work with a greetings card retailer and let’s say greeting cards cost on average $3. Well, when they ran a marketing campaign, they couldn't make this pay in the first transaction. They were probably spending, several times this example on marketing, let’s say for ease of math they were spending $5 to get a customer in and the profit from the first sale might've been something like $1. Okay. Well, if we tried to justify that based on the first sale we wouldn’t have run the campaign, but actually what we knew is customers came back several times a year.

So actually we changed this equation to show not just profit per unit but to show profit for the first six months. And that's how we ran the campaign, asking ourselves what marketing cost now would pay for itself and generate a profit in six months. So that's another way to look at it. And that's much more helpful if your business, if it's difficult to justify making a profit on the first transaction and you've got good repeat spend, then you can use exactly the same formula here.

Let's go back to my trusty list there. The other thing to bear in mind is cash flow and timing of payments. Now, where you are spending marketing bucks today and you're going to get sales in over the next two weeks, it's less relevant. But let's just take that previous example. We just said, well, we're actually looking to spend marketing money now and potentially we're not going to get all of our money back for several months. Well, depending on your type of business and how much cash you've got in the bank and how much money you plan on getting in, that might not be a campaign that's going to work for you. So you do need to think about the timing of payments and income and when it's going to pay back, because that will mean certain kinds of campaign are going to be better for you from a cash perspective than another.

The final two points here, which are really connected, are tracking and budgets. Yes, you should plan out several campaigns but all that plan is, is a budget worked out in advance. How much do you want to spend on each campaign per unit? Just like we did in our example here, we came up with all $2 right now, if you do that, this becomes a target, right? I In our example, for these maths to work. I want to spend $2 a unit.

You can actually take things a bit further and you could build in a little buffer there, right? You could say something like, okay, this makes $2 per unit. Well, actually, you know what? If I don't hit my $2 marketing budget?, maybe I need to be a bit more conservative. I could say my target in this example is to spend only $1.50 per unit. And that's your target. 

Next, what you're going to do is to measure the performance of your campaign as it's running. You're going to check progress at the end of each week or day. Look at how much you're spending on marketing, how many sales you've got, what's the number coming out? Is that in line with your target or your budget? Because if you're spending less than your budget, there's a real opportunity to spend more money there to get more sales because because it's profitable, it makes sense economically. Or if you actually you're tracking to spending $50 per unit on marketing when you should be spending $5, you need to put the brakes on.

So if you check your margins and daily basis, you can pull back, you spend before you lose too much money. So this tracking is really, really important. And I always say that with marketing campaigns, a lot of people think all the work is done upfront. Yeah, I'll design a campaign, I'll work, or the promotion is I'll get the materials printed or designed. Well, actually, when you're running the campaign, that's when the hard work really starts because you really need to be monitoring it and tweaking the campaign as you go to make it a success. And once you've finished your promotion or marketing activity then take a step back and analyze how it went, what went well and what didn't go well.

How much money did you make? Were your targets realistic or not? Would I run this kind of campaign again, or would I tweak it in a different way? The time to do that is exactly when you finished your campaign. When everything is fresh in front of your mind, jot it all down on a piece of paper and then refer to that when you're planning your future campaigns.

That way you start off with something and you iterate on it and you make it more and more effective for your business. And that, in essence, is the way that I look at running marketing campaigns and specifically answering the question how much should I spend on marketing. All you’ve got to remember is this one very simple equation and you won't go far wrong.

Well, I hope you found that helpful? And if you did, I've put all of the key point savings in a free fact sheet, which you can download below. And if you do that, I'm also going to send you another free factsheet, which is my guide to turbocharging your cash flow in ten easy steps. These are steps that I've learned over 25 years working with a range of clients, and they really do work, so it's well worth downloading and having a look at that.

 And if you haven't done it yet, as I say, do subscribe to my channel because I'd love to be able to chat to you again. But thanks so much for your time and I will see you in the next video.