Are you wondering how to determine your 2009 marketing budget?  You’re not alone.

I hear all the time that people are spending too much for marketing. In fact, someone I met with just yesterday exclaimed that they were spending $120/month on Google ads!  I know that everything is relative and to one person $120 is the amount they spend on dinner, while it’s a month’s worth of marketing for another, so how do you know what is the right amount to spend on your marketing?

Well, most businesses determine their marketing budgets as a percentage of sales.  For start-ups, that number may be as high as 20% of sales.  Let’s face it, there are a lot of costs when you first start a business.  But once you have your new logo and your business cards and other basic marketing materials, your costs should come down.  That’s why established businesses usually set aside anywhere from 3% to 10% of sales for their marketing.  However, picking a number out of a hat can be a pretty arbitrary way of determining how much to spend on your marketing budget.

That’s why I like to use some real numbers.  For purposes of this blog posting, let’s assume we’re talking about Internet Marketing.  First, you need to understand the life-time value of your customer.  On average, how much does a customer spend with you?  Not just the first time they do business with you, but over the long-haul.  Some businesses retain customers for decades, while other businesses have a one-shot sale and that’s it.  Once you know how much the average lifetime value is, you can more easily determine how much you can spend to acquire a new customer.

Let’s say, for round numbers, that a customer is worth $10,000 over their lifetime.  Believe it or not, even places like Taco Bell or McDonald’s may have life time values around $10,000 or more.  Think about how often you eat there, how much you spend and multiply that by 80 years.  You may wind up spending a ton of money.  So if McDonald’s just thought about you as a $2.99 Value-Menu customer, they’d only spend a couple pennies on advertising to you, but they know that you’ll eat there for the next 50 years so why not invest in marketing to keep you coming back.

Anyway, the next thing you need to determine is your profit margin.  To use McDonald’s as an example, they can’t look at your visit as $2.99 in their pocket.  After all, there are expenses like food, employees, taxes, insurance, and of course marketing.  After you account for all of those costs, McDonald’s may only make $.30 on your visit.  But, over time, that adds up.

So if they know that they can come out with $.30 in their pocket after each visit, then they can more easily calculate how much they can afford to spend on marketing.

With the case of Internet Marketing, everything is so much easier, because you can easily calculate all of the numbers.  The Web is rich with data-tracking devices so you can easily determine where your traffic came from, how much it cost, and even if the visitors were actually buying, or if they were just tire-kickers.  That sort of stuff is invaluable.

So back to answering the question of how much is the right amount to spend on your advertising.  Here’s an example…

You know that your average sale is for $60.  Of that $60, let’s say that half of it is profit.  You make $30 per sale.

Then you have developed a web site that converts visitors into sales pretty well.  How about, for every 100 people that hit the site, you make 3 sales.  That’s $180 in sales, which means you have $90 in profit.  Great so far.

But if you have to spend $90 or more to get 100 people to the site, you’re actually losing money.  That means that if you pay just $1 per visitor, you’ll spend $100 to get 100 people to the site.  Spend $100 to make $90…That’s a losing proposition every time.  The longer you continue to do that, the deeper in the hole you’ll go.

But if you can cut your ad costs to just $.50 per person, then you’ll spend $50 to get 100 people to the site, and you’ll make $40.  Not a bad deal.  That means that the more traffic you can drive to the site, the more money you’ll make.  It’s a formula for making money all day long.

Hope that helps to determine your marketing budget.  As you think about how to determine your 2009 marketing budget, keep these tips in mind.

Chadd Bryant