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It is a well-known fact of business that entrepreneurs need to spend money to make money. When you are first starting out, marketing expenses are most likely going to be a large portion of your expenses. As word about your product or services gets around, you don't have to spend as much to bring in new customers. Every business owner must determine the percentage of revenue to devote to his or her marketing budget that aligns with the goals of the business. One way to determine if the amount of money you spend on advertising is appropriate is to calculate your total costs and compare it to how much others in your industry spend to attract and retain customers.
How to Calculate What Your Company Spends on Advertising
To arrive at your marketing costs to sales ratio, divide the total you have spent on all forms of advertising by the total revenue your company has earned from sales. You should exclude money that is not directly earned from sales, such as interest from bank accounts or royalty revenue. When you are adding up costs, be sure to include all of the following:
Other factors to consider in calculating the return on investment (ROI) of your marketing plan include the average annual value of a customer, the percentage of leads that turn into sales and the expected response rate of each type of advertising employed.
Setting a Marketing Budget Based on Your Cost to Sales Ratio
Since spending more money on marketing doesn't guarantee more sales, it is important to set a limit that will bring you consistent results. As an example, assume that you normally see revenue of $100,000 when you spend $10,000 on marketing. In the future, you can estimate a ROI of 10 to one. Taking the example further, assume that you increase your marketing budget to $25,000 and see a return of only $125,000. You are spending more money, but your ROI has suddenly dropped to five to one. You can conclude that a budget of $10,000 is adequate to achieve the type of results you expect.
Consider Variations of Your Industry
Since there is considerable variation in marketing costs from one industry to the next, it is critical that you research your own industry before setting your marketing budget. For example, a marketing budget of two percent may be appropriate for a large retail outlet but it will only frustrate you if you apply it to your business in the travel industry.
In a recent study of sales and marketing professionals, just over one percent of respondents reported that they had no marketing budget at all while three percent stated that they spent 20 percent or more of their company's revenue on marketing. However, these responses represent only the extremes on both ends. Sales and marketing representatives with a budget up to 10 percent of the company's revenue accounted for 83 percent of all responses. The remainder fell in the 11 to 19 percent range.