How much should I spend on marketing?
When business owners first dip their toe into paying for marketing, there’s a number of fears that come up.
How much should I spend?
How much can I spend?
How do I track ROI?
What kind of results should I expect?
There’s lots of variables at play here – but in today’s video I will share with you a simple calculation to help give you some boundaries or guard rails in which to operate within.
Everyone will have different budgets and different levels of willingness to spend, but by doing some quick maths we can help keep it sensible and gradually move you towards profitable paid campaigns.
First we need to establish what a particular customer is worth to your specific business.
There are many ways to calculate this – one simple way of calculating LifeTime Value or LTV is below:
Average transaction size x
Number of transactions per year x
Average number of years they stay with you
Now this can vary for businesses with longer sales cycles etc, but for most businesses this is a quick way to figure out the upper limit of how much you should spend.
So if the maths is:
$200 average transaction
2 x transactions per year usually
2 x is the number of years they stay a customer
Then the simply LTV will be $800.
Then we’d take out profit, let’s say it’s 50% so $400 LTV in profit.
We’d aim to spend under $400 to acquire a customer.
You can spend more – assuming you will find ways to get them spending more later – but you’d generally avoid spending any more.
Now there’s a lot more to accurately capturing LTV, but for the sake of you getting out there and ripping in, use this simplified calculation for the time being.
If you have questions about your specific business, ask below and I’ll help you out.