When we first engage with a customer, one of our first questions is: What is your marketing budget for this project?
Typically we are met with uncomfortable silence for one of two reasons:
- The customer thinks we are trying to hustle him somehow, and that if he throws out a number that is too big, he will be overcharged.
- He has no idea what his budget should be and is using pricing from different potential vendors to figure that out.
For the first one, we can’t work with a budget that is too small (our minimums tend to hover around $10k for a 3 month SEO project), so if we don’t fit in the customer’s budget, we don’t want to waste their time or ours. So we both dance around the conversation until someone puts out a number.
For the second one, in the past we have engaged in some hand-wavey averaging to figure it out, after which neither we nor the customer feel all that confident that we have found a fit; it’s usually nothing more than a best guess as to what that budget should be.
So in this post, I am going to give you a formula to figure out what your marketing budget should be.
What You Need to Know About Your Business
First, some caveats.
- You need to have a business with demonstrated customer demand
- You need to know what your customer acquisition costs are
- You need to know what your average customer lifetime value is
- Your customer lifetime value needs to be higher than your customer acquisition costs
- You need to know what your conversion rate is
Don’t have all that? No problem, we will help you with those too.
Your marketing budget, per customer, is 20% of the customer lifetime value (CLTV).
First, the bottom-up way. So if your CLTV is $1,000, you can spend $200 MAX to acquire a customer. If you can get customers for $200 (or less) and create $1,000 (or more), then congratulations, you are in business!
So if you want to acquire 100 customers this month, then your marketing budget needs to be $20,000 and from that you will see $100,000 in revenue. Very nice.
Plugging it into your SEO Strategy
That’s the basics, but the next step is to plug it into your traffic and SEO strategy, so I am going to take this example and expand on it.
Assume you get 1,000 visitors a month to your website, and your conversion rate is the standard 1%.
So every month you get 10 new customers, and each customer makes you $1,000, or $10,000/month.
1,000 visitors a month is nice, but you want 10,000 visitors. Assuming your conversion rate stays the same, that will get your 100 new customers, and each customer makes you $1,000, so that will be $100,000/month. Not bad.
Don’t forget, each customer costs you $200 to acquire, so you need to have a budget set aside for $20,000. The trick is that you don’t know WHICH of those 10,000 visitors will convert to customers, so your marketing budget is averaged across ALL customers, not just the ones to convert. So now, your $20,000 marketing budget averages out to $2/visitor. This is also a good guideline for figuring out how much you can pay for paid traffic, such as AdWords. It becomes easy: don’t bid more than $2 per click!
Determining Your Conversion Budget
Earlier, I assumed your conversion rate was the standard 1%. Let’s say we want to get that to 2%.
That means we will double our revenue for the same amount of traffic. So for 1000 visits, we will get 20 customers. Each customer will give us $1,000 in revenue, so we will make $20,000. So for a conversion marketing strategy investment, we need to budget around $4,000.
Rounding it up Your marketing budget per customer is 20% of your CLTV You can tweak your conversion rate or your traffic or both, but you need to understand what to expect before you invest.
This formula isn’t set in stone, but it should help you answer that question when a marketing firm like Egg asks, “what is your marketing budget?”