Apr 15, 2022 · Partners
Digital marketing can be a huge cash drain for your business, especially if you don't have the right strategies to manage it. The good news is that investing in digital marketing can be cost-effective and make a big difference to the growth of your business.
If you're new to digital marketing, you may not know how much you should be investing. If you're not careful, you could spend more than you should on your digital marketing strategies. So, how much should you be investing? The answer depends on several factors, including your goals, business, and time constraints. Here's a brief overview of what you should consider when figuring out how much you should be investing in digital marketing!
Digital marketing promotes products over the internet using paid ads, social media posts and other channels to reach consumers. The most common forms of digital marketing include search engine optimization (SEO), content marketing and search engine marketing (SEM).
The factors depend on digital marketing Investment, including your goals, business, and time constraints.
The amount you should be investing in marketing largely depends on your goals. For example, if you're new to digital marketing and want to measure the success of your ads, you may want to start with a small budget. On the other hand, if you're looking for advertising that will lead to more leads or higher sales, you may need a higher budget.
You should also consider the time constraints of your business when determining how much you should invest in digital marketing. For example, if your company has a lot of time constraints, such as during seasonal holidays, then it makes sense to invest less in marketing than if your business has fewer constraints.
The amount you spend on digital marketing is up to you and what your company needs for its growth when it comes down to it. Digital marketing can be cost-effective if done well, but it can also be a huge cash drain if not managed correctly.
It's important to invest in your digital marketing strategy, but how much you should invest is always a balancing act between cost and results. A good rule of thumb is this: You should spend at least one-third of your annual budget on marketing.
You want to be sure that every dollar you spend on digital marketing produces results, especially when you consider that it's hard to measure ROI.
There are two main types of digital marketing budgets:
Investment budgets — this is where you're spending money on campaigns and individual products. You'll generally invest these dollars for a few months at a time; it's best to have a set budget for these dollars because you're spending this money over some time.
Purchase budgets — this is where you're purchasing products like Facebook ads, Google AdWords advertising or targeted email campaigns. It's better to have smaller, more frequent purchases for this type of budget.
Unfortunately, not every business has the budget to invest generously in digital marketing, especially small businesses and those just starting. So how do you know how much you should be supporting?
Here are the steps to determine how much you should be investing in digital marketing:
The first thing you need to do is figure out what your customer lifetime value is — in other words, how much revenue each of your customers will generate over time. You'll likely have some existing data for this, but if you don't, you can use a simple formula like this one:
Customer Lifetime Value = [Average Order Value] x [Average Number of Purchases Per Year] x [Average Retention Time]
Every business has a different customer acquisition cost, depending on the industry, company size, and other factors. But no matter what your business does, you need first to figure out how much it costs to acquire a customer.
It is important because it gives you how much you need to spend on marketing to turn a profit. For example, to calculate your CAC (customer acquisition cost), use this formula:
CAC = total sales and marketing spend/number of customers acquired
For example, if you spend $20,000 per year on digital marketing and get 200 new customers, your CAC is $100 ($20,000/200).
Every business has a minimum monthly revenue it needs to cover its operational expenses. Once it reaches that level and beyond, it starts making a profit. It is called the breakeven point (BEP), and it's an important concept in determining your digital marketing budget. You can calculate BEP using this formula:
BEP = fixed costs/(average sale price - variable costs)
For example, a business has fixed costs of $1,000 and a variable of $200. The average sale price is $400. BEP = 1,000/(400-200) = $333.33. It means the business needs to generate at least $333.33 in revenue each month to cover its costs and start making a profit.
Once you know your breakeven point, you can use it to set a budget for your digital marketing efforts. For example, if your goal is to reach break even within a certain period (say, six months), you can allocate your marketing budget accordingly. Remember that your BEP may change over time as your business grows or changes, so be sure to revisit it regularly and adjust your budget as needed.
The starting point in figuring out how much to spend is your target cost per acquisition (CPA). It is how much you're willing to pay to acquire each new customer. The CPA goal should be the same as or less than what you have determined your company's average customer value is. You can use this formula to determine your target CPA:
Average Customer Value x 1 / Number of Customers You Want Per Year = Target CPA.
For example, if the average customer spends $500 with your store over 12 months and wants to add 3,000 new customers next year, your target CPA would be $500 x 1/3,000 = $166.66.
Determine your maximum CPA based on customer lifetime value:
The first step to determining how much you should spend on digital marketing is calculating your maximum cost per acquisition (CPA). When choosing your CPA, you need to know two numbers: the average lifetime value of a customer (LTV) and the average time for a customer to go from prospect to customer.
If you have this data, you can use this formula:
Customer LTV / Customer Sales Cycle = Maximum Cost Per Acquisition
Let's say that your company sells enterprise software, the average lifetime value of a customer is $250,000, and the average sales cycle is nine months. It means that your maximum CPA would be $27,778.
Determine what percentage of your overall budget you want to spend on digital marketing. Then divide that by the number of months you wish to pay it.
If you have a 2% conversion rate, you could spend up to $1,500 per month on advertising ($75 / 0.02). So, for example, if you have a total budget for digital marketing of $10,000 in 12 months, divide that by 12: You can spend up to $833 per month.
Digital marketing is an important aspect of a business's growth and helps establish an authoritative online presence. It can be a big cash drain if you don't have the right strategies to manage it, but when done correctly, it can be cost-effective and make a big difference to the growth of your business. Of course, the amount you invest depends on many factors, including your business, your goals, and your time constraints.
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