As a business owner, determining how much to invest in your marketing can be a challenging task. You want to invest enough to generate new leads and revenue, but you don’t want to overspend and negatively impact your bottom line. The key is to tie your level of investment to the results you’re looking to achieve and ensure that you have the proper level of return on marketing investment (ROMI) expectations.
In this post, we’ll dive into how you can determine your marketing budget with an emphasis on results-driven approaches and ROI. We’ll walk you through a step-by-step process to determine how much to invest in your marketing based on the results you want to achieve and your expected return on investment. You’ll discover the math required to perform the calculations and use examples to illustrate each step.
Here’s what we’ll cover:
- How to determine your new business revenue goal
- How to determine how many new customers you need to add to hit your new business revenue goal
- How to determine how many new sales opportunities you need
- How to determine how many leads your marketing needs to generate
- How to determine how much to invest in your marketing
By following this approach, you’ll be able to confidently invest in your marketing, knowing that your investment is tied to your business goals.
5 Steps to Determine How Much to Invest in Your Marketing
Step 1: Determine your new business revenue goal
The first step in determining how much to invest in your marketing is to determine your new business revenue goal. This is the amount of revenue you want to generate from new business in a given period, such as a quarter or a year.
To determine your new business revenue goal, you’ll need to consider factors such as your current revenue, growth rate, and market conditions. For example, if you currently generate $1 million in annual revenue and want to grow by 10% in the coming year, your new business revenue goal would be $100,000 ($1 million x 10%).
Example: A data consulting firm currently generates $500,000 in annual revenue and wants to grow by 15% in the coming year. Their new business revenue goal would be $75,000 ($500,000 x 15%).
Step 2: Determine how many new customers you need to add to hit your new business revenue goal
The second step in determining how much to invest in your marketing is to determine how many new customers you need to hit the new business revenue goal you set in the first step. The most common way to do this is based on your average client value. This is the amount of revenue you typically generate per client.
To determine how many new customers you need to add, divide your new business revenue goal by your typical client value. For example, if your standard client value is $10,000 and your new business revenue goal is $100,000, you need to add 10 new clients to hit your goal.
Example: A marketing agency has a typical client value of $15,000 and wants to generate $150,000 in new business revenue. They would need to add 10 new clients to hit their goal.
Hint: if you are unsure how to calculate your average client value, see the FAQs below.
Step 3: Determine how many new sales opportunities you need
The third step in determining how much to invest in your marketing is to determine how many new sales opportunities you need based on your average win rate. This is the percentage of sales opportunities you typically convert into new customers.
To determine how many new sales opportunities you need, divide the number of new customers you need to add by your average win rate. For example, if you need to add 10 new customers and your average win rate is 50%, you must generate 20 new sales opportunities.
Example: An IT services company needs to add 15 new customers with an average win rate of 30%. They would need to generate 50 new sales opportunities to hit their goal.
Hint: if you are unsure how to calculate your sales win rate, see the FAQs below.
Step 4: Determine how many leads your marketing needs to generate
The fourth step in determining how much to invest in your marketing is to determine how many leads your marketing needs to generate based on your average lead quality rate. This is the percentage of qualified leads that are likely to convert into sales opportunities.
To determine how many leads your marketing needs to generate, divide the number of new sales opportunities you need by your average lead quality rate. For example, if you need to generate 20 new sales opportunities and your average lead quality rate is 20%, you would need to generate 100 new leads.
Example: A software company needs to generate 30 new sales opportunities and has an average lead quality rate of 15%. They would need to generate 200 new leads to hit their goal.
Hint: if you are unsure how to calculate your lead quality rate, see the FAQs below.
Step 5: Determine how much to invest in your marketing
The final step is determining how much to invest in marketing based on your average gross profit margin and expected ROMI. Gross profit margin is the percentage of revenue that remains after deducting the cost of goods sold (COGS). This represents the revenue that can be used to cover fixed expenses and generate profit. Typically, service businesses have higher gross profit margins compared to product-based companies.
To determine how much to invest in marketing, you must assess your expected ROMI. ROMI is the return on marketing investment, which measures the revenue generated from each dollar invested in marketing. A positive ROMI indicates that the marketing investment is profitable, while a negative ROMI means that the investment is not generating enough revenue to cover the cost.
To calculate ROMI, divide the revenue generated from marketing by the total cost of marketing, and multiply the result by 100 to get a percentage. For example, if you spent $10,000 on marketing and generated $50,000 in revenue, your ROMI would be 400% ($50,000/$10,000 x 100).
Once you have determined your expected ROMI, you can use it to calculate how much to invest in marketing. As a general rule, you should aim for a ROMI of at least 300% to ensure that your investment is profitable. If your expected ROMI is lower than 300%, you may need to adjust your marketing strategy or reduce your marketing budget.
To determine how much to invest in marketing, use the following formula:
Marketing budget = (new business revenue goal x (1 – gross profit margin)) / expected ROMI
For example, if your new business revenue goal is $500,000, your gross profit margin is 70%, and your expected ROMI is 400%, your marketing budget would be:
Marketing budget = ($500,000 x (1 – 0.70)) / 4 = $37,500
This means you should invest $37,500 in marketing to achieve your new business revenue goal of $500,000, assuming a gross profit margin of 70% and an expected ROMI of 400%.
Introducing the Marketing Investment Calculator
The Marketing Investment Calculator is a powerful tool we developed to help service business owners like you determine how much to invest in your marketing using a step-by-step approach. With this tool, you can easily input your revenue goal, gross profit margin, typical client value, sales win rate, and lead quality rate, and the calculator will perform all of the necessary calculations to give you a clear picture of how much to invest in your marketing to achieve your desired results. This calculator is an excellent resource for service business owners who want to make data-driven decisions about their marketing investments.
Discover the Marketing Investment Calculator >>
Conclusion
Determining how much to invest in marketing is critical for service business owners. Using a results-driven approach and calculating your expected ROMI, you can make informed decisions about your marketing budget and achieve your business goals. Remember to regularly review and adjust your marketing strategy to ensure that you optimize your return on investment and generate profitable growth for your business.
Frequently Asked Questions
How do I calculate my average client value?
To determine your typical client revenue, you need to calculate the average amount of money you receive from each client. This can vary depending on the type of services you offer and the pricing structure you have in place.
To calculate your typical client revenue, you can use the following formula:
(Total Revenue / Number of Clients) = Typical Client Revenue
For example, let’s say your service business generated $500,000 in revenue last year, and you had a total of 100 clients. Using the formula above, your typical client revenue would be:
($500,000 / 100) = $5,000
This means that, on average, each of your clients generated $5,000 in revenue for your business. Knowing this number can be helpful in determining how much to invest in marketing efforts to acquire new clients.
What if revenues vary greatly by the client?
If the amount of revenue you generate from each client varies greatly, then determining your typical client revenue may not be as straightforward as using a simple formula.
In this case, you could try calculating the weighted average client revenue, which takes into account the different revenue amounts for each client. To calculate the weighted average, you need to multiply the revenue for each client by the percentage of total revenue that the client represents, and then add up those results.
Here’s the formula:
(Revenue1 x % of Total Revenue1) + (Revenue2 x % of Total Revenue2) + … = Weighted Average Client Revenue
For example, let’s say your service business generated $500,000 in revenue last year, and you had five clients with the following revenue amounts:
Client 1: $100,000
Client 2: $75,000
Client 3: $50,000
Client 4: $150,000
Client 5: $125,000
To calculate the weighted average client revenue, you would first need to determine the percentage of total revenue that each client represents:
Client 1: 20% ($100,000 / $500,000)
Client 2: 15% ($75,000 / $500,000)
Client 3: 10% ($50,000 / $500,000)
Client 4: 30% ($150,000 / $500,000)
Client 5: 25% ($125,000 / $500,000)
Then, you would multiply each client’s revenue by their percentage of total revenue, and add up those results:
($100,000 x 20%) + ($75,000 x 15%) + ($50,000 x 10%) + ($150,000 x 30%) + ($125,000 x 25%) = $107,500
So in this example, the weighted average client revenue is $107,500. This number can be useful for determining how much to invest in marketing efforts to acquire new clients, especially if your revenue varies greatly by client.
How do I calculate my sales win rate?
To calculate your sales win rate, you’ll need to know the number of sales opportunities you had during a given period of time (such as a quarter or a year), as well as the number of those opportunities that you won.
Your sales win rate is simply the percentage of sales opportunities that you won.
Here’s the formula:
Number of Sales Wins / Number of Sales Opportunities = Sales Win Rate
For example, let’s say you had 100 sales opportunities last quarter, and you won 25 of them. To calculate your sales win rate for the quarter, you would divide the number of sales wins by the number of sales opportunities and then multiply by 100 to get a percentage:
25 / 100 = 0.25 0.25 x 100 = 25%
So in this example, your sales win rate for the quarter was 25%.
It’s worth noting that your sales win rate can vary depending on a number of factors, including the competitiveness of your industry, the quality of your sales leads, and the effectiveness of your sales process.
What if I don’t have the data to calculate my sales win rate?
If you don’t have the data to calculate your sales win rate, you’ll want to start tracking it going forward. In the meantime, you can still estimate your sales win rate based on industry benchmarks. For example, if you’re in a highly competitive industry, you might estimate a sales win rate of around 20-30%. If you’re in a less competitive industry, you might estimate a higher win rate of 40-50%.
However, it’s important to remember that these are just estimates, and your actual sales win rate may be higher or lower depending on a variety of factors specific to your business. As you start tracking your sales opportunities and wins, you can adjust your estimates based on your actual data.
To get actual data, you’ll need to start keeping track of all of your sales opportunities and whether or not you win them. This can be done using a CRM (customer relationship management) tool or a simple spreadsheet.
It’s important to be consistent in tracking all of your sales opportunities, including both inbound and outbound leads. You should also track the source of each lead (such as referrals, cold calls, or website leads) so that you can identify which sources are most effective for your business.
How do I calculate my lead quality rate?
If you want to calculate your lead quality rate, use the following approach:
First, you’ll need to define what qualifies as a “qualified lead” for your business. This will depend on a variety of factors, such as your target audience, your sales process, and your overall business goals.
Next, you’ll need to track the total number of leads you generate over a given period of time. This includes all leads that come in through your marketing efforts, such as website visitors, email subscribers, and social media followers.
Finally, you can calculate your lead quality rate by dividing the number of qualified leads by the total number of leads and then multiplying by 100 to get a percentage. The formula looks like this:
Number of Qualified Leads / Total Number of Leads x 100 = Lead Quality Rate
For example, let’s say you generated 500 leads last quarter, and after applying your qualification criteria, you identified 100 qualified leads. To calculate your lead quality rate, you would divide 100 by 500 and then multiply by 100 to get a percentage:
100 / 500 x 100 = 20%
So in this example, your lead quality rate would be 20%.
What if I don’t have the data to calculate my lead quality rate?
If you don’t have the data to calculate your lead quality rate, it’s important to start tracking it as soon as possible. This data is critical to understanding the effectiveness of your marketing efforts and making informed decisions about how to allocate your marketing budget.
To start tracking your lead quality rate, you’ll need to define what qualifies as a “qualified lead” for your business. This will depend on a variety of factors, such as your target audience, your sales process, and your overall business goals. Once you’ve defined your qualification criteria, you can begin tracking the total number of leads you generate, as well as the number of qualified leads.
One way to track your lead quality rate is to use a customer relationship management (CRM) system that allows you to tag and categorize leads based on their level of engagement and qualification. Many CRM systems also offer reporting and analytics features that can help you calculate your lead quality rate over time.
How do I determine what makes a qualified lead?
To determine your lead qualification criteria, you need to identify the characteristics that define your ideal customer. This will help you target your marketing efforts more effectively and ensure that you’re focusing on leads that are most likely to convert into paying customers.
Here are some steps to help you define your lead qualification criteria:
1. Review your existing customer base: Look at your current customer base and identify the common characteristics among your best customers. This might include demographics (age, gender, location), industry, company size, job title, or other factors.
2. Conduct market research: Conduct market research to understand the needs, pain points, and preferences of your target audience. This can help you identify the types of customers who are most likely to be a good fit for your services.
3. Analyze your sales data: Look at your sales data to identify patterns in the types of leads that convert into customers. This can help you understand the factors that are most important for lead qualification.
4. Define your ideal customer profile: Based on your research and analysis, create a detailed profile of your ideal customer. This should include all of the key characteristics that define your target audience.
5. Develop a lead scoring system: Once you’ve defined your ideal customer profile, you can develop a lead scoring system to help you prioritize leads based on how closely they match your ideal customer profile. Assign points to each of the criteria you’ve identified, and use these scores to rank your leads and focus your marketing efforts on the highest-priority opportunities.
By defining your lead qualification criteria, you can more effectively target your marketing efforts and focus your resources on the leads that are most likely to convert into paying customers.
How do I determine my cost of goods sold (COGS)?
For a service business, the cost of goods sold (COGS) typically includes the direct costs associated with providing the services. These costs may include the following:
1. Labor costs: This includes the salaries or wages of the employees who provide the services, as well as any benefits, such as health insurance or retirement contributions.
2. Materials and supplies: Depending on the type of service, you may need to purchase materials or supplies to provide the services. For example, a landscaping business may need to purchase plants, seeds, and fertilizer, while a consulting firm may need to purchase software or equipment.
Subcontractor costs: If you use subcontractors to provide some of the services, their fees would be included in the COGS.
To calculate the COGS for a service business, you would add up all of these direct costs associated with providing the services during a specific period of time, such as a month or a year. For example, if your service business provided consulting services during the month of January, your COGS for January might include the following costs:
Salaries and benefits for employees who provided consulting services: $50,000
Materials and supplies for consulting projects: $2,000
Fees paid to subcontractors: $10,000
Total COGS for January: $62,000
It’s important to note that for service businesses, the COGS is often a relatively small portion of the total expenses since there is no physical product to manufacture or inventory to manage. However, understanding your COGS is still important for determining the profitability of your business and making informed decisions about pricing and resource allocation.
How do I know if my marketing investment is generating a positive ROMI?
To determine if your marketing investment is generating a positive ROMI, you need to track the revenue generated from your marketing campaigns and compare it to the total cost of marketing. If the revenue generated is higher than the cost, your investment is generating a positive ROMI. If the revenue generated is lower than the cost, your investment is generating a negative ROMI.
What should I do if my ROMI is lower than expected?
If your ROMI is lower than expected, you may need to adjust your marketing strategy or reduce your marketing budget. Consider targeting a different audience, changing your messaging, or using different marketing channels to improve your results.
How often should I review and adjust my marketing budget?
It is recommended to review and adjust your marketing budget on a quarterly basis, as marketing results can vary over time. This allows you to make data-driven decisions and optimize your marketing strategy to achieve your business goals.
