How to calculate a growth-focused marketing budget?

Some businesses succeed in generating a lot of sales and profits without investing a single dollar in advertising. However, this is not the reality for all entrepreneurs. Marketing is often one of the fundamental pillars of a business's growth and sustainability. There are countless possibilities and strategies to help your business generate more sales: simple solutions like flyers, Google Ads (formerly Adwords), Facebook Ads, radio, TV, and much more complex solutions, such as synchronized multichannel campaigns and automated marketing. However, when investing in marketing, it is important to clearly define your budget! Here’s how to calculate a marketing budget focused on growth.

Define the KPIs of a marketing budget

The first step is to identify the KPIs (Key Performance Indicators) that you wish to use to measure the results of your advertising campaigns (ROAS). KPIs are indicators that allow you to measure the outcomes of your actions taken for your business. There are hundreds of them!

To calculate your marketing budget and stay in control of your objectives, here’s the list of KPIs we suggest:

• The LTV (Lifetime value or customer value)

• The CPL (Cost per lead or cost per prospect)

• The CPA (Cost per acquisition or cost per acquisition)

• The CPM (Cost per 1000 impressions or cost per thousand impressions)

• The CPP (Cost per purchase or cost per purchase)

The LTV (Lifetime value)

The LTV represents the value that a customer brings throughout their relationship with your business.

For example, for a car brand, customers typically keep their car for an average of 4 years and renew at 40%.

Assuming that with interests and service fees, the average gross profit from selling a vehicle is $5000 for brand X over 4 years, here’s how to calculate the LTV over 8 years for a car brand:

• 1 customer = 1.4 (due to a 40% renewal) cars over 8 years.

• $5000 X 1.4 = $7000 in profit over 8 years.

• The LTV over 8 years for an average customer for brand X is therefore $7000.

To learn more about LTV, you can read the following article.

The CPL (Cost per lead)

What is a lead, first of all? Simply put, a lead is someone who provides you with their contact information in exchange for information or content (eBook, consultation/contact form, newsletter, etc.). There are different qualities and temperatures of leads.

The cost per lead may be measured in two ways… and often it is measured in only one way by marketing agencies. Nonetheless, it is a fundamental indicator if you want to learn how to calculate your marketing budget properly.

There is the net cost and the gross cost. The net cost represents your cost per lead, including agency fees and content creation fees. The gross cost represents the cost to generate a lead compared to the amount spent on advertising.

Example of a net CPL:

• Content budget (visuals, videos, photos): $1500

• Campaign management budget over 3 months: $1500

• Media placement budget (Facebook Ads): $7000

• Total budget of an advertising campaign: $10,000

• Total number of leads: 100

• Net CPL: $100

Example of a gross CPL:

• Media placement budget (Facebook Ads): $7000

• Total number of leads: 100

• Gross CPL: $70

The numbers for gross CPL are much lower, and therefore much more positive when presented to a client. However, two very important elements for measuring your campaign’s profitability are missing: the cost of content and campaign management. Why is it important to calculate these two KPIs during your campaigns?

Simply to measure the impact and quality of your content. Usually, the better your content, the better the results will be. This will impact the amount you need to invest to achieve your lead objectives.

For example…

You are used to generating leads for a gross CPL of $50 with average quality content that you have created in-house. Your annual budget is $10,000. Therefore, you generate 200 leads.

After a while, you decide to hire an agency to try to achieve better results, and this for 12 months.

The agency is responsible for content creation and management of your campaigns. Your gross CPL drops to $33, so you’re super happy! But when you calculate all the agency fees…

• Content: $5000

• Campaign management: $3000

• Advertising spend: $10,000

Thanks to the campaigns from this agency, you have generated 300 leads, which is 100 more than the previous year… but when you add the agency fees, your leads actually cost you 60$.

Of course, in this scenario, you are delegating a good part of the work, so you save a lot of time. One could say that the agency is doing a good job because, despite the content creation and campaign management costs, your CPL increased by only 20%. For us, it’s a win-win!

The CPA (Cost per acquisition)

The CPA (Cost per acquisition) is the price you must pay to acquire a new customer. Once again, I suggest calculating net and gross values.

But be careful! We are not talking about the CPP (Cost per purchase), but rather the cost to acquire a new customer.

To calculate the CPA, you need to use the following equation:

CPL ÷ closing rate = CPA

For example, if your CPL is $50 and 1 lead out of 10 converts to a sale (a closing rate of 10%), your CPA will be $500.

The CPM (Cost per 1000 impressions)

The CPM (Cost per 1000 impressions) is the KPI that measures the cost of distributing your content across various platforms. An impression on Facebook is counted each time someone sees your ad in their news feed. It is crucial to distinguish it from the reach KPI, which calculates the number of people who have seen your ads. For instance, if a person sees your ad 3 times in one day, that counts as 3 impressions but a reach of only 1.

However, the CPM of impressions is the one mainly used in marketing.

The CPM is essential for roughly determining the budget needed to achieve your branding objectives. There are several reasons to run this type of campaign on the internet, which I elaborate on in the following article.

The CPP (Cost per purchase)

The CPP (Cost per purchase) is the price you must pay for a person to buy one of your products. Like the other two KPIs mentioned above, you can calculate both net and gross values for each purchase.

The CPP is very relevant, especially if you can sell products multiple times to the same person. Otherwise, as in the case of one-time services (like roofing, for example), you would be better off using only the CPA.

Note that the CPP is very commonly used in e-commerce and online training platforms.

Define clear objectives to calculate your marketing budget

To know how to effectively calculate your marketing budget, you need to know how to define your objectives. In fact, doing unprofitable marketing is rarely a good thing, unless you can afford to run 'brand authority' campaigns. The goal of these campaigns is to build awareness, not to generate sales directly. However, we will not discuss this type of campaign in this article. We will instead focus on profitable campaigns aimed at generating customers.

1. The first question you should ask yourself is: how many sales (in dollars) do I want to make more thanks to my marketing campaigns? For this example, let’s say we want to generate $100,000.

2. The second question: what is the average LTV of my customers? In the case of roofing, people usually only call upon your services once. If the average price of a roof is about $10,000, the LTV is $10,000.

3. Next, what is your gross margin on a $10,000 roof? As this field is fairly familiar to us, let’s say the gross margin is approximately 30%. So, this gross margin is $3000.

4. Now, how much are you willing to pay to make a sale that gives you approximately $3000 in gross margin? This varies by industry, but generally, it is between 10% and 30%. In the case of roofing, $600 is a very reasonable price. This refers to 15%.

You now have a budget of $600 to generate enough leads to close a sale. By using a CRM, you could quickly calculate your closing rate on internet leads. To be conservative, we will estimate a 10% conversion rate on leads. Therefore, you will need to generate 10 prospects at $60 to make a sale if you want to stay within your objectives.

To achieve an additional $100,000 in sales, you will therefore need to plan a marketing budget of $6000.

The example of Gro

To help you better understand how to calculate your own marketing budget, we share our own KPIs and the marketing budget from one of our internal campaigns:

Objective and budget

• Objective: $250,000 in additional sales over 12 months

• Content budget (videos, writing, photos, etc): $35,000

• Media placement budget: $10,000

• Desired leads: 450

• Desired net CPL: $100

• Desired net CPA: $1000

Results (after 3 months)

We have closed 9 contracts for a total amount of $50,000, just 3 months after the start of our marketing campaigns.

• Additional sales: $50,000 (20% of objectives)

• Content investments: $35,000

• Media placement investments: $1000 (20% of budget)

• Obtained leads: 200

• Net CPL: $182.50

• Current CPA: $4055

Explanations

Looking at the current statistics, we are not profitable at the moment. To reach our objectives, we need to sell an additional $200,000 worth of contracts with $4000 in media placement. As we generated many more leads than we thought during these 3 months, we are not worried about being able to reach our targets in the next 9 months.

Also, since we have invested heavily in content (website, videos, SEO, articles, photos, etc.), this content should be amortized over a longer period. If our objectives of $250,000 are met in 12 months, our investment in content creation will be 'paid off' and our next clients will be much more profitable!

Thus, the importance of having evergreen content, that is to say, content that remains relevant after several months/years!

Paid marketing is that which is planned for the long term

Our marketing strategy is focused 80% on the long term. We invest a lot in branding and SEO. This is a strategy that is generally very profitable but which puts some pressure on cash flow (!!!). The ROI may happen after a year. It’s after that when the results become exponential. It is simply a matter of choice. 🙂

If you have any questions and would like to learn more about how to calculate your marketing budget, feel free to reach out!