The mere thought of calculating a marketing budget can bring despair into the heart of the bravest marketing managers. Sure, it’s not the most thrilling task by a long shot, but knowing the ins and outs of your marketing budget elevates your entire marketing operation.
Also, calculating your marketing budget gives you clarity, direction, and control. And it’s the best way to track your expenses, ensuring you never overspend.
But how do you calculate your marketing budget?
In this post, we’ll show you how to calculate your marketing budget in 5 simple steps.
Calculate Your Marketing Budget in 5 Simple Steps
While calculating your marketing budget isn’t complex, it can be tricky if you don’t focus on the correct elements. The following 5 steps are all you need to calculate your marketing budget.
1. Calculate Your Revenue
Knowing your revenue is the first step to calculating your marketing budget. But which revenue should you use?
Costs, expenses, profits, or bottom lines, are not necessary for calculating your marketing budget. All you need is your company’s gross revenue.
It’s also a good idea to look at your company’s estimated revenue to calculate your marketing budget with more foresight.
And while you’re looking at your gross and estimated revenues, it’s wise to examine your company’s changes in revenue over time. The latter will help determine if your marketing strategy is working.
2. Examine Your Strategy
A new company will invest in marketing differently than an established company would. So the average we saw above (9.5% of gross revenue) doesn’t apply to every business.
For example, startups often spend more on marketing than companies that have been in business for a while. Similarly, an established company that has lost momentum may need to invest more than its direct competitors.
It’s up to you to ask the right questions. Consider the following:
- What must we accomplish this quarter?
- Is it in line with our long-term strategy?
- Is it attainable?
You must also consider how much you spend to get a new customer. To do that, you must know how much it costs to get a new lead.
3. Calculate Your Cost Per Lead (CPL)
It’s hard to single out a marketing key performance indicator (KPI). But if there’s a KPI you cannot go without in marketing, it’s your cost per lead (CPL). Your CPL indicates how much you need to spend on marketing to acquire a new lead.
So, what should your CPL be?
According to a study based on data collected across 30 industries, CPL ranges from $83 (e-commerce) to $705 (higher education). Clearly, the average CPL varies by industry, and it’s unlikely that two companies have the same CPL.
Calculating your CPL is simple. You take the total amount you spent on marketing and divide it by the number of leads you generated.
For example, if we have to spend $25,000 to generate 150 leads, the amount spent per lead would be $166.
($25,000 / 150 leads = $166 per lead)
4. Calculate your Lead Conversion Rate (LCR)
Knowing how many leads your marketing brings in is invaluable. But it’s all the more potent when you know how many leads become paid customers. That’s your lead conversion rate (LCR).
To calculate your LCR, you divide the number of customers by the number of leads. For example, if it takes 500 leads to get 50 customers, your LCR is 10%.
CPL and LCR are essential KPIs you must use to calculate your marketing budget. They help bridge the gap between your marketing and sales teams.
What’s more, with CPL and LCP, you can calculate your marketing budget without breaking a sweat. Because once you have these two figures, all that’s left to do is determine how many leads you need to meet your marketing goals.
5. Align It With Your Goals
Once you have your CPL and LCP, you must apply these figures to your marketing goals. One way to do it is to divide your customer acquisition goals by your LCR.
So, if your goal is to get 50 new customers by the end of the quarter and your LCR is 10%, this is what it looks like: (50 new customers / 10% = 500 leads)
Based on this calculation, we would need 500 leads to hit our goal of 50 new customers.
Finally, we can reflect on our CPL to determine our marketing budget. To do that, you multiply the number of leads by the cost of each lead.
In our case, each lead costs $166. To generate 50 leads, we need to budget $83,000 to reach our marketing goals.
Calculating your marketing budget comes down to three key elements: your marketing goals, CPL, and LCP. Once you have a grip on them, calculating your marketing budget is effortless.