August 10, 2016
A few customers have been asking the same question “How do I work out how much to budget for marketing?” I wanted to cover this briefly here so that I can direct them (and you) to my thoughts on this.
Let’s start with the question “what am I currently paying to acquire new customers?” or what is your Customer Acquisition Cost (CAC). Even if all you’re putting into the business is time. Remember that your time is worth something. You could be working a salary, so whats your opportunity cost by not doing that?
Lets say your time is worth $100 per hour, then how many hours did you put in to acquire your first customer/s? Maybe you made 20 cold calls, sent 100 emails and attended 10 sales meetings. Add in the hours of research and maybe you arrived at figure of around 80 hours: 80 x $100 = $8,000. But, having done the ground work you think on average it now only takes you 30 hours to acquire new customers. 30 x $100 = $3,000. It’s a rough figure, but its a starting point.
Now that you know roughly what it costs to acquire a new customer, you can ask yourself two questions.
1. Is it sustainable and efficient to keep acquiring customers at $3,000 each? Clearly, net revenue on that sale needs to be more than $3,000 to be anywhere near profitable. You should also consider CLV or Customer Lifetime Value – which we will cover in a later post.
2. How can I reduce the acquisition cost and scale the sales process?
This is where digital acquisitions strategies such as PPC (Pay Per Click) come into their own. They help you bring down CAC costs, fill your pipeline and scale the sales process.
Now you need to start making some assumptions. Firstly, it’s important that you know what your original sales forecast was. Secondly, you need to get a rough idea of how much it should cost you to acquire a new customer online. Talk to an agency or do some research. Talking to someone that serves your niche will mean the answer is likely to be more accurate for your product or service.
Let’s say the feedback is that you should be able to achieve the same sale faster and at one third of the cost. Perfect. Next, work out how much you can afford to spend on marketing based on your current trajectory. That number is probably a percentage of net revenue, lets say 15%. Then run more assumptions – what happens if I spend 20%, 30%, 40% whats does that mean for your bottom line? Note, we don’t need to spend all of our cash here, we just need enough to start testing your assumptions. Keep in mind, that if you’re hiring an expert to run the campaigns for you, then you’ll need to work that into your budget.
The next step is to start running campaigns. Only then can you start to paint an accurate picture and over time update your assumptions with actual data. As more data comes in you’ll be able to start predicting your revenue with some level of accuracy. The key here is to keep optimising. It never stops, but with experience and real data you will drive down your CAC costs and grow your business.
I hope this helps. Please email me direct on [email protected] with any questions.