If you could spend $1 and make $5, would you spend the dollar? Would you be happier if you made $8 instead of $5? Numbers like these form the dream goals of every marketer: how to nail your marketing budget by getting more while spending less.
Most savvy decision-makers watch their marketing budgets carefully. This game is played differently by different companies, and while there are potential pitfalls to LTV budget planning, the end goal is the same every time.
The foundational value of inbound marketing is just that—producing more positive marketing ROI than with conventional marketing—in fact, on average, inbound costs 61% less than traditional or outbound methods. By using good metrics and persona targeting, you’ll be able to nail your marketing budget with confidence every time.
Playing the Numbers Game
I don’t yet think there’s a smart phone app for this, but ask any MBA and you may get five (or fifty) ways Customer Lifetime Value (LTV) can be used to formulate a marketing budget. Where to start? Kissmetrics has a great infographic on how to calculate LTV.
Rules of the Game
Rule #1: You should only apply value to your marketing for what you’re going to get out of it. Referral sales have no bearing on your marketing spend and you shouldn’t rank any gains from revenue acquired through channels your marketing doesn’t directly touch.
Rule #2: LTV formulas that don’t account for gross profit margins are not accurate. Wouldn’t it be nice to have no worries about cost of goods sold? Everything is worth something, even your time.
Rule #3: LTV needs to account for the lifetime value of a customer, not just sales from any given year. Marketers only view LTV for any given year shoot themselves in the foot regarding the true value of ongoing marketing efforts.
Kicking it Off
Let’s see how you can nail your marketing budget through some real-world examples.
“If I spend $1 on marketing and only sell $1, I don't make any money.” You’re right, you won’t, at least not in the first couple of years.
The example above is how startups often function. Notice profitability starts to increase after year 2.
Notice some important variables in the image above:
- Average Gross Margin.
- Customer Retention (Churn) Rate.
- Recurring sales.
- New Customers Acquired.
- And the big key here, Sales Growth.
Are you selling one-offs, never to anticipate repeat sales or new customers buying from you? Probably not, and here’s where LTV rules—on recurring sales. Coupled with anticipated growth through inbound marketing, even with a meager start, the potential for growth in time can be significant.
Here’s an example of an established mid-sized company with good website traffic, contemplating adding inbound marketing strategies to their marketing budget.
- Has a goal to acquire at least 6 new customers per month.
- Has an established website will good metrics.
- Their current average value of a sale is $25,000.
- Each customer reorders once every 2 years (hence the 0.5 number in the “recurring” field).
We created this example with very conservative sales growth projections. Look at Total Marketing Spend and Avg. Purchase Price. At first glance, you might think you would not want to spend $12,500 per month just to get one $25,000 sale.
Take a second look. You are expecting to close at least six new customers each month. Add the numbers. Would you spend $150,000 per year on inbound marketing to acquire roughly 1 million dollars in profit for your company each year?
As you can see, the weight of this win is in both new customers acquired year by year and by recurring sales.
Another Look at the Numbers
Inbound marketing's foundational principal is growing website traffic, capturing new leads, and producing amazing positive marketing ROI. Check out this online ROI calculator to see how web traffic relates to ROI.
The use of Cost of Customer Acquisition (CAC) in these examples only applies to direct costs associated with a marketing budget. When looking at your entire scope of operations, you'll want to also include expenses like salaries. You can use CAC to calculate profitability but you'll be probably looking at any one given year rather than the entire customer lifecycle as with the LTV calculations above.
What About PPC?
Most advertisers are using to being happy if marketing ROI simply runs in the positive. See the following real example of PPC marketing ROI from Hubspot’s product demo site.
The 39% ROI from the Adwords campaign shown in the above report is not bad—for PPC. I’ve seen many PPC reports showing severe negative marketing ROI. Many marketers are simply resigned to accepting those not so great numbers.
Now that you have a good idea on how to budget for your marketing, let’s put those dollars to work where they can produce leads.
What Does Persona Targeting Have to Do with All of This?
It would be easy to say, “Persona targeting has nothing to do with a marketing budget.” But in fact, it has everything to do with budget. Now that we can justify the numbers to spend, what are we going to spend it on? Here’s the value proposition: Spend it on traditional advertising with its lower overall ROI, or reallocate some funds and do inbound.
The way inbound wins is only by persona targeting—creating and publishing content directed at a certain target audience. It’s simple, you develop top ranking on a series of keywords, your best customers search for your products or services online, and they find you.
While inbound does require a number of steps, including producing content, the one place to start, and to get it right, is by fine-tuning your persona development. Ready to start? We’re got a free template to help you get going!