Why not dazzle your boss with a measurable marketing plan? What’s a measurable plan? One that includes quantifiable objectives and a budget to reach those objectives based on past results.
When management gives you the company’s sales objectives, be sure you’re ready with a grounded-in-fact budget proposal to achieve them.
Where the budget begins
Let’s say your company’s goal is to generate $1,000,000 in sales and your presumed average sale is $500.
- You may need 2000 sales ($1,000,000 divided by $500) to achieve your goal.
But you really want to be sure about that “presumed average sale,” especially if you sell multiple products or services (or your sales force has the flexibility to offer discounts).
- Determine Total Revenue for last year and divide by Number of Orders or Sales to find out for sure. If you want management to believe your numbers, base them on reality.
- Total Revenue / Number of Sales = Average Dollars Per Sale
What was your total marketing budget last year?
- Total marketing budget / number of sales last year = Cost Per Order (CPO)
Multiply your Cost Per Order by the number of sales you’ll need to achieve the company’s goal for the next planning period.
- Let’s say your CPO was $80 @ 2000 sales = Marketing Budget of $160,000.
This is the type of analysis that illustrates you’re basing your budget on reality. CFOs will especially appreciate this detail. If you want to preserve your marketing budget, this is how to show your boss and CFO that your budget is justified.
When you can bring CPO to the table, you can base your budget negotiations on actual results, rather than guesswork or dreams.
New customer goal
Here’s another example, based on an objective of bringing in a specific number of new customers, as well as having an overall dollar sales objective (which we’ll address below).
Objective = 10,000 new customers. Past Cost Per Order (marketing expense/number of orders) was $30. (Since we’re looking at acquiring new customers, this ratio is also called Cost Per Acquisition or CPA.)
10,000 new customers (goal) @ $30 Cost Per Order = $300,000 prospecting budget
Dollar sales goals
You can also estimate your dollar sales, using your new customer objective and your Average Dollars Per Sale from new customers. (We’re using $100 average first sale. Take all Dollar Sales from new customers last year divided by number of new customers last year.)
10,000 new customers (goal) x $100 Average Sale = $1,000,000 sales
If you have a $3 million overall sales objective, that means $2,000,000 in sales needs to come from existing customers.
If your Average Sale from existing customers is $150, you need 13,334 orders to hit $2 million in sales:
- $2,000,000 / $150 = 13,334
How much does it cost you to drive sales from existing customers? Let’s say it’s $10 Cost Per Order.
13,334 orders @ $10 Cost Per Order = $133,340 budget
Add your $300,000 prospecting budget and your $133,340 customer marketing budget to establish your total marketing budget: $433,340
What if your boss or CFO says that budget isn’t acceptable?
- You could create new Offers designed to generate higher average orders (for new customers and/or existing customers)
- If you’ve been tracking your Cost Per Order by media channel, you may have identified some channels that bring in orders at a lower cost. You could use only those channels, assuming they can generate enough sales to hit the company’s objectives.
But realistically, you may need to revise your objectives. This is the time to have a fact-based discussion about objectives and the marketing budget, to ensure that everyone has realistic expectations about what you can accomplish.
How much to spend to bring in a customer? Cost Per Acquisition versus Lifetime Value
You can also look at proposed marketing programs by your past Cost Per Acquisition.
If you’re like most marketers, you might struggle with the question, “How much can we spend to bring in a new customer?” The answer depends on your company’s particular business model.
Are you willing to just breakeven on each new customer (or even bring in customers at a loss)? In that case, you’ll rely on customers making future purchases and becoming profitable over time. If you’re willing to just breakeven:
Maximum Cost Per Acquisition (CPA) = up to your Gross Profit Per Sale
If you’re willing to spend up to your Gross Profit Per Sale to bring in each new customer, then your marketing budget is:
Gross Profit Per Sale x desired number of new customers
If you’re willing to bring in customers at a loss, you may be willing to spend more.
What if you need to make a profit on the first sale? Then you can’t spend your entire Gross Profit Per Sale.
Or maybe each new sale must contribute to overhead and profit immediately. In this case, the amount you can spend to acquire a customer will be the Marketing Allowable Cost Per Sale:
Marketing Allowable Cost Per Sale =
Gross Profit Per Sale minus Overhead and Profit (typically a percentage of Cost of Goods Sold)
You should also run a Breakeven Analysis (along with this type of “how much can I spend” analysis) per campaign or channel, to be sure your marketing programs have a reasonable chance of achieving your objectives.
Excerpted from Chapter 19 of our new book, The Results Obsession: ROI-Focused Digital Strategies to Transform Your Marketing, now available on Amazon.