How do you calculate your marketing budget? How do you know what that budget should be and how it should evolve over the years? 

Well, it’s a question that I get asked all of the time. There are so many approaches out there, but which one works for you? Well, the approach that I like to take with my clients is really based around allowable acquisition cost So what is allowable acquisition cost? Effectively it is how much you can afford to spend in order to buy a new customer. 

Once you know what that number is, it’s really as simple as looking at how many new customers you need over the year and multiplying that allowable acquisition cost out by the number of new customers and ta-da! You have your marketing budget. Now, obviously from a principal perspective it’s as simple as that: how do you work out what your allowable acquisition cost actually is?.

Well, there are two main factors that influence your allowable acquisition cost. The first factor is about how many transactions you have from your average customer. The more repeatability for your particular product or service then the more latitude you have because you might find that you might be able to give away all of the gross profit from the first sale or maybe even the first couple of sales to be able to buy a new customer. The other factor that drives it, is all about your gross margin If you have a big margin then you’ve obviously got more in the pot to play with Higher margins – there’s more in the pot, low margin – less in the pot.

What allowable acquisition cost makes sense for you and for your business? and once you know that number, make sure that your marketing team fully understand it and make sure that all of your marketing activity is delivering customers at that number or less If you don’t have proper systems in place to be able to track the effectiveness of your marketing, check out “Episode 33” So it is really as simple as that: figure out how many new customers you need figure out what your allowable acquisition cost is and you have a basis for developing your marketing budget I’ll see you next week on “Mind Your Own Business”

If you’re looking for more small business tips, then we’d like to see you every week on “Mind Your Own Business,”

Marco Soares is an award-winning business coach in Sussex and is available if you’d like help implementing these tactics.