1. How Much Do You Need to Make?
To figure out what you need to spend on digital marketing, you first need to clarify what your goals are. How you approach digital marketing can vary quite a bit depending on whether your ultimate goal is to drive clicks, conversions or leads, sales, revenue or a certain return-on-investment (ROI).
When you get right down to it, the ultimate goal of any marketing effort should be ROI. After all, if your digital marketing spend isn’t driving profitable revenue for your business, why are you marketing online?
Clicks and even conversions are great, but your company doesn’t make money from clicks (in fact, you actually spend money on clicks) or conversions. It makes money from sales.
With that in mind, the first thing you need to determine before you decide what your digital marketing budget should be is to decide how much revenue you want to drive. Once you know that, you can use that information to determine how much ad spend it will take to reach that revenue goal.
2. Who Are You Marketing To?
Once you know how much money you want to make from digital marketing, you need to identify who you are marketing to. This is critical, because different buyer personas require different marketing tactics. And, even more importantly, different buyer personas turn into different types of buyers.
So guess what? If you don’t understand your buyer personas, you can’t create an effective digital marketing strategy!
If you’ve got a sales team, talking to sales can be one of the fastest ways to get a decent buyer persona together. After all, they’re the ones who talk to your customers the most, right?
However, even talking to your sales team and doing a little research isn’t enough to really get at the level of detail you need to put together an effective digital marketing plan. To do that, you need to get on the phone and call your actual customers.
Ask how they found you, why they converted and what convinced them to pay you. This information will give you a ton of insight into your marketing and sales process that you can use to both improve the performance of your advertising and choose your marketing budget.
3. What are Your Customers Worth?
Typically, people look at buyer personas as a good way to craft an effective marketing strategy. Buyer personas are great for this, but they are also an important part of putting together an effective digital marketing plan.
For example, imagine you are advertising for a SaaS business called SaaS-A-Frass that has the following pricing structure:
In this situation, you’re probably targeting 3 different buyer personas:
- Small business “Steve”
- Mid-market business “Mandy”
- Enterprise business “Edward”
Small business “Steve” has much smaller and simpler business needs than Edward or Mandy, so he’ll probably choose the Starter package. Mandy will probably want the Professional package and Edward will likely need the Enterprise package.
Assuming that Steve, Mandy and Edward stick around for an average of 14 months, 4 years and 9 years, respectively (average lifetimes for a SaaS client) and buy 5, 20 and 100 licenses (again, respectively), here’s the lifetime value for each of these personas ( [licenses/mo] x [# of licenses] x [typical customer lifespan in months] ):
- Steve: $1,750
- Mandy: $72,000
- Edward: $1,590,000
These numbers look really exciting, but not all of that money is profit.
A normal SaaS company pays about 22% for fulfillment, 9% to sales and has a 40% overhead, leaving them with about 29% of the lifetime value of each client to play around with. That means to simply break even, SaaS-A-Frass has to spend less than the following to acquire a customer from Facebook:
Maximum Acquisition Cost
- Steve: $507.50
- Mandy: $20,880
- Edward: $461,100
If SaaS-A-Frass can keep their acquisition cost below this threshold, they’ll make money. If it costs more than this to acquire each of these customers, they’ll lose money.
See why buyer personas are so important to budgeting?
Of course, it’s unlikely that the market is saturated with Edwards, so SaaS-A-Frass will need a mix of these deals to hit their revenue goals. That mix will dictate their Facebook budget.
So, if SaaS-A-Frass is willing to spend $0.18 on marketing to produce $1.00 in lifetime value (for a 11% total profit margin), SaaS-A-Frass’s can afford to pay the following for each buyer persona:
Customer Acquisition Cost
- Steve: $315
- Mandy: $12,960
- Edward: $286,200
If SaaS-A-Frass can’t produce paying customers from a particular buyer persona at a price point below this threshold, they probably shouldn’t be marketing to that buyer persona.
However, if SaaS-A-Frass’s digital marketing efforts are currently producing buyers from each persona at these CAC (or even a CAC below these thresholds), SaaS-A-Frass can use that information to then calculate their marketing budget.
4. How Much Do You Need to Spend to Reach Your Goals?
At this point, things are pretty simple. Just take your CAC, average purchase order value and average number of purchases (if you have a subscription model, you can just use the average lifespan of each buyer persona here) and plug them into this calculator!
[calculoid id=”19629″ show_title=”0″ show_description=”0″]
The default for this calculator shows the monthly budget and ROI for SaaS-A-Frass, assuming that SaaS-A-Frass wants to produce $2,425,500 in new revenue from digital marketing each month and they’ve determined that to do that, they need their marketing efforts to produce 100 sales a month (90 Steves, 9 Mandys and 1 Edward).
Per our example, a new Steve pays $125/mo for an average of 14 months, a new Mandy pays $1,500/mo for an average of 48 months and a new Edward pays $15,000/mo for 108 months.
Plugging all of that into the calculator, SaaS-A-Frass will need to budget $348,300/mo to achieve their new lifetime revenue goals.
See? I told you this part is easy! To make things even better, you can use this calculator to calculate your overall digital marketing budget or you can pick a specific strategy and use it to figure out whether or not a given strategy makes sense for your business. For example, if you need a CAC of $75, but your average cost-per-click on AdWords is $25, AdWords may not be the right digital marketing channel for you.
Now, as you might imagine, this approach isn’t a perfect estimate of what it will take to hit your revenue goals. This calculator is only as accurate as the information you can give it. But, it’s a lot better than picking your monthly at random and hoping that digital marketing will produce the results you need.