This is one of the most difficult marketing questions to answer as there are so many variables. There are many different ways to consider the appropriate amount to spend on marketing. I will focus this article on sales lead generation and how much should be spent to get leads that convert. Perhaps the best method to approximate spend for lead generation activities is the Lifetime Value of Customer.
LIFETIME VALUE OF CUSTOMER
This method is particularly useful for higher involvement purchases within the business to business market, and high value consumer purchases. The lifetime value of customer method forces you to consider how much each customer is worth to you. This is not just this quarter or this year but over the lifetime of the customer. Extrapolating this method enables you to consider how much your company is truly worth and can add significant dollars to the sale price when you come to sell your business.
Consider the revenue of each customer per purchase, the number of times they will purchase in their lifetime (perhaps 10 years) and work out their total value to your business. Once you have the total worth you then consider the gross profit (profit after cost of goods is taken out) provided by the customer. Consider two lead generation examples below.
Consider a service which is provided to a customer once per year, with a revenue of $10,000.
Total lifetime value of customer (assume 10 years) = $100,000
Let’s now assume a gross profit of 50% and our gross profit = $50,000
Consider an ongoing service valued at $850 per month, yearly value of $10,200.
Total lifetime value of customer (assume 10 years) = $102,000
Let's now assume a gross profit of 50% and our gross profit = $51,000
Now what is it worth spending to get this customer on board? If it costs you $5,000 to get that customer is it worth it? If you spend $5,000 per month and achieve perhaps 10 leads with two of those leads converting to a customer, then this would net you two customers with a lifetime value of $200,000 and a lifetime GP of $100,000. Your total cost to gain two customers giving you $100,000 in gross profit is $5,000. Is this worth it? I would say yes.
What if you spend $10,000 per month? Would this increase leads and conversions? What if you could not spend $5,000 per month but could increase your conversion of leads to customers with a better lead capturing and sales methodology. Could you get away with $2,500 per month? What if you spent $20,000 or $30,000 and so on?
From this point, you need to consider your goals for the business:
- Increasing sales revenue might decrease cost of goods, and
- Increasing gross profit without having to increase any other costs will increase your bottom line profit.
WHEN TO USE LIFETIME VALUE OF CUSTOMER TO DETERMINE MARKETING SPEND
This method becomes important if you have customers who are loyal and will predictably stay for a long period. For example, customers who are accountants, software providers with residual income, ongoing services providers such as maintenance or managed service providers, etc.
These businesses can predictably be valued by the number of customers they have and their revenue. Therefore, increasing the revenue of the business is a major goal because when it comes to exiting the business the total lifetime value of each customer is used to calculate the sale price.
As you are building your business or business unit, understanding the lifetime value of each customer and thereby considering how much you are willing to spend to get a customer on board is determined by several further factors:
- your cash flow or cash at hand,
- your ambition for the business,
- your market, and
- your marketing strategy.
The more cash you have at hand and the greater your ambition for the business then the more money you will spend to get the sales through the door. The bigger question is do you know what to spend it on? This will depend on the market you are in and your marketing strategy.
Fit 4 Market are experienced marketing consultants operating in Adelaide, Melbourne, Sydney, Brisbane and Perth