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How Much Should I Spend on Marketing?

Authored By Mitch Gooze

"How much money should I spend on Marketing?"

Here is my answer: It depends what you mean by marketing. (Now there's a typical consultant's answer.) Since most people who ask that question are referring to the promotion side of marketing, let's focus there.

The promotion side of marketing generally includes activities designed to create awareness and/or move customers further along the buying cycle until a sales person (telephone or face-to-face) takes over. These activities can include advertising, public relations, trade shows, brochures and collateral materials, premiums and giveaways, and some portion of your website costs.

One answer is that you can afford to spend up to the net present value of the lifetime profit contribution of a new customer. (Huh?) OK, let's try this another way: A new customer has some value to your business. What is that value? Realistically it's the sum of the profits that the customer generates over the time they do business with you, discounted (a financial technical term having to do with the value of a dollar today versus that same dollar in the future, which is obviously less) to its present value today.

Several obvious problems crop up. First, how much does the "typical" new customer buy from you? What is the marginal profit contribution of that added customer? Clearly the contribution to profit from a new customer (or an existing customer buying more) is greater since all other fixed costs are already being incurred regardless of their purchase.

Second, how long are they likely to be your customer? One year, five years, longer? Again, the longer they are your customer, the more valuable they are to you. What is the on-going cost of retaining the customer? How does that affect their continued profit contribution?

Third, what is the present value of that profit stream? Well, if you can calculate the profit stream...(ahh, there's the rub)...then the present value is just a simple calculation to be performed by a computer.So, it's obvious that to determine "how much can I spend on marketing" requires that you understand the profit value of a customer. That demands more knowledge of a customer than many companies have. Does that excuse you from not knowing...I don't think so.

What if you do know, can you afford to spend that total amount on marketing? Well afford is an interesting word, as my Father taught me when I was young, "can't afford" doesn't necessarily imply a lack of money, but a lack of desire to spend it on a particular item. Just because you can afford to spend that much money on marketing promotion, doesn't mean you should.

If you have found a marketing message that can create valuable new customers on purpose, then you have found an effective marketing message. Now you must work to make it more efficient. To be sure we are communicating...effectiveness is doing the right thing, efficiency is doing things right. First, do the right thing, then do things right.If you don't work to make your effective marketing messages more efficient, you can still spend too much money on effective marketing and suffer a competitive disadvantage. Now this is obviously better than spending too much money on an ineffective marketing message, but it's still a problem.

The bottom line is that the marketing to sales process is a manufacturing process to produce valuable customers on purpose. Like any manufacturing process, to increase output (profitable sales) you must focus first on the manufacturing bottle-necks.

So before you rearrange the budget and realign your entire bottom line to account for an expanded marketing budget, think of what you are trying to accomplish...and if you have the resources to follow through. Increasing marketing promotions to generate more leads that are not followed up is a waste of money no matter how you look at it.

 
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