Do you know how much you should spend on marketing in a given year?
It’s a common question business owners think about as the year winds down.
With 2022 coming to a close, now is an excellent time to plan your marketing budget for 2023.
The only correct answer to the question: The right amount to spend on marketing is just enough to generate the number of quality leads and sales it takes to achieve your annual business goals.
The good news: It only takes working through five proven steps to build an effective 2023 marketing budget for your organization. We’ll reveal them in this article.
Marketing Spending in the Goldilocks Zone: The Amount That’s Just Right for Your Business
According to a recent survey of Chief Marketing Officers prepared by Deloitte for Duke University, organizations typically spend between 10.4 and 13.7 percent of their total business budget on marketing. The actual percentage varies by industry. However, that range has been relatively stable for quite a while and is a good benchmark for how much you should set aside to promote your business.
How marketing budget dollars are utilized has changed significantly over the last few years. The same survey shows that businesses currently spend 58 percent of their marketing money on digital efforts – up almost 15 percent year-over-year. The rest goes to traditional marketing like signage, discounts, offers, sponsorships, direct mail, trade shows, and advertising.
Beyond splitting your marketing money between digital and traditional strategies, you need to allocate it across different marketing tactics. This is typically easier to do for digital efforts such as paid search, content marketing, and social media advertising. That’s because it’s usually easier to track the success of digital marketing compared with traditional marketing. The digital channels you should invest more in are those that earn you the most quality business at the lowest possible cost.
Admittedly, tracking sales attribution across multiple digital channels can be complex. In many cases, it’s impossible to credit a single channel with a piece of business. Consumers often go through multiple touchpoints, such as social media, website visits, online chat services, and more before they become customers. Even so, good analytics tools can help you determine which ones perform consistently well and which aren’t worth the time or money.
Be aware that you also need to consider overhead costs for your marketing efforts in your budgeting process, including staffing and agencies, training, and the specialized tools and software you use. Media spend alone won’t give you an accurate picture of marketing expenses. Some relatively cheap media channels come with high production and management costs, making them more expensive than you may think.
Now it’s time to explain a five-step process to develop your 2023 business marketing budget and business plan.
1. Determine Your Revenue and Customer Acquisition Goals
A sound marketing budget and plan must be based on defined revenue growth and new customer goals for 2023. Work with your accountant, financial advisor, salespeople, and other team members to determine ambitious – yet attainable – goals. Once you set your goals, you can figure out how to achieve them and plan your budget from there.
For instance, let’s say you want to acquire 100 new customers by the end of 2023. Start by asking yourself: How much do I need to spend to bring in 100 new customers?
To answer that question, you must determine how much it costs to acquire one new customer. You do that by looking at two data points: cost per lead and conversion rate.
2. Calculate Your Average Cost Per Lead
Your cost per lead (CPL) shows how much marketing spend is required to bring in a fresh lead. It’s a relatively simple but sound measure of how well your marketing efforts are performing.
To determine your CPL, divide the total amount you spent on marketing in 2022 by the number of leads you generated all year. For example, if you spent $200,000 on marketing and brought in 2,000 leads, your CPL is $100.
Tip: You can use this equation to calculate your CPL for each marketing channel you use. This will help you figure out which are most cost-effective.
So, what’s a reasonable cost per lead? It depends on the business and the value of what you sell. A $200 cost per lead makes no sense if you typically sell customers a $50 item and generate no repeat business. However, this CPL is very efficient if you sell a $10,000 service to clients that continue to buy from you.
When it comes to creating your marketing budget and plan, a simple CPL calculation is a valuable snapshot of how well you’re doing at generating leads at any given time. Once you start regularly collecting and documenting CPL data, you can benchmark your performance over time to identify ways to improve it by comparing the results in different channels. This will help you figure out which marketing efforts are likely to generate the best return on investment (ROI).
3. Calculate Your Average Conversion Rate
Generating leads is a good thing. However, if you’re not converting those leads into customers, you’re wasting your marketing dollars.
The formula for your conversion rate is the number of closed sales divided by the number of leads. You can use this equation to calculate your conversion rate for each marketing channel you use, just like CPL.
Suppose you bring in 1,000 new leads, but only 50 become customers. Then your conversion rate is five percent.
If you don’t have accurate sales data to calculate an accurate average conversion rate for your business, it will be challenging to set up your marketing budget. Without data showing how your marketing efforts contribute to sales, you’re playing a guessing game, which is never a good thing. If you find yourself in this situation, it’s time you invest in some marketing and sales tracking software – make it a priority in your 2023 marketing budget.
Once you know how much each lead costs you and how many of your leads are likely to convert into customers, it’s time to come up with your 2023 marketing budget.
4. Figure Out How Many Leads You Need
The next step is determining how many leads your business will need to reach your 2023 goal. The simplest way to calculate this is by dividing your new customer goal by your average conversion rate.
Let’s be optimistic and imagine that your company has a goal of 100 new customers with an average ten percent conversion rate. So, you divide your “100 new client goal” by 10 percent to come up with 1,000 leads. This means you’ll need to generate at least 1,000 new leads to reach your goal of 100 new customers in 2023.
5. Come Up With Your Final Budget
Once you know how many leads it will take to reach your goal, you can return to your CPL calculation to come up with what your final marketing budget should be. Keeping with the previous examples, let’s assume you need 1,000 new leads, and your average cost to generate each lead is $100. Multiply the two numbers together to determine your 2023 marketing budget. In this case, 1,000 leads multiplied by a $100 cost per lead equals a $100,000 budget. To acquire 100 new customers, your company must spend at least $100,000 on marketing in the upcoming year.
Once you have this total, you can allocate these dollars to the marketing tactics — in the proportions — used to come up with your cost per lead and conversion rate.
Your 2023 Marketing Budget: The Bottom Line
If you want to take a more strategic approach to determining your marketing budget for 2023 and beyond, you must focus on the two numbers that have the most significant impact on your marketing and sales results: cost per lead and conversion rate.
Spending more in channels that deliver a relatively low CPL will bring in more leads, but sometimes quantity comes at the expense of quality. If your conversion rate falls as your number of leads increases, it may be a sign the leads aren’t the best fit for your business.
If your CPL goes up and your conversion rate sees significant improvement, it may be worth it to pay more for leads that are more likely to become customers, as long as the cost makes sense for the products and services you sell.
All these decisions depend on having accurate data about your marketing and sales efforts. If you don’t have marketing and sales tracking tools capturing this information, add them to your 2023 marketing budget – it’s an investment that will pay off significantly in the years to come and give you the power to fine-tune your marketing strategy and spend money more efficiently.
Check it out: Learn how you can set marketing priorities for 2023.