If you’re like most companies, you’re asking the wrong question about your marketing budget: How much should we spend on our digital marketing?
According to Gartner research, the average marketing budget is about 10.2% of gross revenue. This is the “magic” number you'll tend to hear when you ask this question. But it won’t tell you why you’re spending the money or what value your organization is getting out of it.
The real question isn’t how much to spend, but how much revenue do you want to generate, and in what timeframe? Do you need to maintain your existing balance of new and returning customers to meet your revenue goals? Do you need to increase the number of new customers? Or do you need to increase revenue from existing customers?
There’s one metric that is absolutely necessary if you’re going to answer these questions knowledgeably. Without it, you won’t know the budget you’ll need to meet your revenue goals—or, just as important, where and how to spend it.
One Metric to Rule Them All
The most important metric driving your marketing budget is the Lifetime Value of a Customer to Cost of Customer Acquisition Ratio (LTVC:CoCA). This is as simple as it gets: if you have a LTVC:CoCA of 5:1, that means to make $5.00, you need to invest $1.00 in marketing.
Here’s how it breaks down.
Lifetime Value of a Customer. Some companies have a one-and-done relationship with customers. Others will sell to the same customer multiple times. What’s the total expected profit (in dollars) that you’ll receive from a single customer over the course of your relationship? Multiply that by your company’s Gross Profit % to get your Lifetime Value of a Customer.
Expected Lifetime Profit x Gross Profit % = LTVC
Customer Acquisition Cost. This is the total amount of marketing expenses you spend to acquire customers per year divided by the total number of customers acquired. Expenses include fully loaded annual salaries of FTEs involved in the marketing team, program spend on advertising, vendors, software, conferences, etc.
Make the Metric Work for You
Now that you’ve got the LTVC:CoCA metric, you can start having fun with your analysis. The metric is extremely valuable if you have multiple market sectors or personas that you’re targeting.
Break out the larger marketing and customer buckets by segment or persona. This will help you understand where you’re doing great, need a little help, and even if you should leave a market.
The chart below shows how drilling down into market segments gives you a different perspective from looking at everything as a single picture. If we just looked at the whole, we’d have a 9:1 LTVC:CoCA. But once we look at the segments, we see that one market segment is highly efficient and profitable—much higher than the overall rate—while the other two segments are somewhat below and far below the overall rate.
You can also analyze across products, services, personas, and more. Figure out what makes the most sense for you.
Fully Informed Budget Planning
Now that you’ve got your LTVC:CoCA metric for each vertical, you can intelligently plan your marketing budget for the upcoming year. If the ratio looks good, explore increasing your marketing investment to generate more revenue.
If the ratio doesn’t look so great, figure out which metrics you can influence. Try increasing your LTVC by improving your nurturing marketing and cross-sell/upsell opportunities with better content and engagement. Or see how you can reduce your CoCA by increasing efficiencies or optimizing spend-to-conversion rates per marketing channel. Have a huge ad spend that only brings in a handful of closed leads every year? Fix the targeting and optimize, or reduce your spend. If organic traffic to your site drives high-quality leads, invest in great evergreen content that will continually drive traffic and leads through your site.
By using the LTVC:CoCA metric to analyze your marketing ROI, you’ll be able to intelligently plan your marketing budget for the coming year. Rather than asking the wrong question of how much to spend on marketing, you’ll be able to make strategic decisions about how to focus your efforts and how to optimize all of your resources for greater revenue.