A Better Way to Determine Your Marketing Budget
Textbooks are overrated. I spent 21 years of my life in school (6 of those studying business), read hundreds of textbooks cover to cover, and remember very little. Textbook information definitely does not equate to real-world relevance. I remember one of my marketing textbooks stated that 13% of gross revenues should be reinvested into your marketing efforts. I say that’s a very one-dimensional (and dangerous) way of determining your marketing budget.
What do you do if your club is at break-even or below break-even? Do you spend 13% and give up more of your own salary, borrow from other departments, or be late on rent? I would hope not. And what if you’re already profitable? By following a pre-determined percentage, you very well could be spending unnecessary profits you could put in your own pocket or redistribute to other projects at your club.
And the timeless quandary of whether the chicken or the egg came first. Do you spend marketing dollars, you don’t really have, expecting to receive them back from sales…or do you try to make more sales so that you have marketing dollars to spend? All of this makes determining a marketing budget seemingly tricky. I have a solution for you.
Instead of worrying about percentage of revenue, the best way for you to determine your marketing budget is to determine the answer to this question:
How much do you need to spend on marketing in order to reach your revenue/profit goals?
To do that, you need to forget everything you’ve learned from textbooks, and you need to work backwards to determine the optimal amount you need to spend on your marketing efforts. To start the process you need to start with two numbers. You need to know how many leads you need to come through your door and you need to know how much it costs to generate a lead.
Let’s assume your average membership grosses, average, $500. Let’s also assume that you’d like to generate $500,000 in revenue this year. That would mean you need 1,000 sales to reach that goal. If you are closing 70% of the leads that come through your door, that means you need 1,429 leads to come to your business this year (1,000/.70=1,429)
By tracking the total number of leads you generate from your marketing efforts, you will know how much it costs to generate a lead. For example if you run a newspaper ad for $750 and it generates 25 leads, your cost per lead is $30. (forget about actual sales when determining this number, since you already calculated it through your closing percentage above) If you run a direct mail campaign, spend $4,000 and generate 50 leads, your cost per lead on that campaign is $70. If you run a referral campaign, spend $500 and generate 100 leads, your cost per lead = $5. You’ll then tally all marketing dollars spent and divide by the total number of leads and you’ll have your cost per lead. In these two examples $5,250 / 175 leads = $30 lead acquisition cost.
You’ll then multiply the lead acquisition cost by the total number of leads you need to reach your annual revenue goal of $500,000 to determine how much you need to spend on marketing this year ($30 x 1,429 = $42,870). This means that your optimal marketing budget is $3,572 per month or 8.5% of revenues.
Remember however, that we’re just considering membership revenues in this calculation. If you’ve done a good job of implementing a variety of profit centers and up-sells, you know that the average lifetime value of a client could be much higher than $500. Conversely, if you’re doing a poor job of retaining members, the loss rate could bring the lifetime value of a client lower. Other things to consider are profit margins, commissions paid to sales people, closing percentage, But the above calculation should give you a good starting point.
The power of working backwards from a lead/sales standpoint rather than simply from a percentage of revenue is that you are focusing on the factors that are responsible for sales and revenue. This is a much better approach to determining your marketing budget. Your investment in marketing will always end up as a percentage of revenue, but it shouldn’t start there. Always begin with the end in mind and you will be more likely to reach your goals.