When many entrepreneurs or CEOs talk to me about creating a budget for their marketing activities, they throw in all kinds of ridiculous figures (RM3000, RM50 000, RM 2 million, etc) with absolutely no reasoning behind them other than just a feeling of what it should be. Sometimes theres the question of ‘what’s the industry average?’ which again has no basis for your business. You need to look at your business numbers for your marketing budget to make sense. There really are only 2 reasons why you’d put in ANY figure to your marketing dollar and this should be the basis for your marketing budget and from here you’ll discover a very clever way of how you can use this to generate an UNLIMITED marketing budget…or in other words Free Money! So here are the two reasons or more specifically two areas to look into when drawing up a marketing budget:

1. Acquisition Cost

This is defined as how much it costs you to land one of two things: a lead and/or a customer. Basically this is how much you’re paying to BUY your leads or customers. In other words, this is the amount of money that you spend in a particular marketing campaigns such as Advertising or Referrals or Social Media to either acquire a lead (prospect) or a customer.

For instance, if I spend RM4000 on an advertisement in the Newspapers and I receive 20 enquiries, that means I paid RM 200 per Lead (enquiry). So basically I bought each enquiry for RM 200. Let’s say the same advertisement resulted in 2 sales only. This means I paid RM 2000 (RM4000/2) per customer. In business my focus is to buy customers for as little as
possible whilst keeping their quality constant. Remember you are always buying customers and leads, the question is for how much?

Here’s where it gets exciting! If I am paying RM2000 for a client are there better ways to buy
them cheaper with the EXACT same money? What if I used the same RM 4000 and hired 2 Sales People for RM 1800 with an RM 200 travel allowance each? And what if both Salespeople brought in 10 sales each? Now I am only paying RM 200 per client whislt previously I was paying 10 times more at RM 2000 per client!!! Or perhaps I can take that same RM 4000 and buy 40 buffet dinner vouchers at RM 100 each from say the Hilton and give 2 vouchers to a friend or a supplier in exchange for 10 personal introductions to 10 favourite clients of thiers. If each friend or supplier gets two vouchers as a thank you gift and in return introduces me personally to 10 of their clients and recommends them to do business with me, that’s RM 200 per 10 leads. And I now will have a total of 20 people introducing to me 10 people each and that’s 200 leads!!! And if I close 40% of these personal introductions as clients that would make it a stuning 80 clients!!! The original 4000 only brought in 2 clients and now you’ve brought in 80 with this. How many times would you run such a campaign if each client gives you a profit of RM 1000? That’s RM 80,000 on this campaign, RM 20,000 on the Sales Person campaign and RM 2000 on the Newspaper campaign. The Dinner and Sales Person campaigns both made a net profit whislt the Newspaper made a net loss (4000 investment – 2000 profit = 2000 loss). Keep the profitable campaigns and drop the ones you make losses in.

In the Sales Person example if I am aquiring 10 clients per RM 2000 per month than if I want 100 clients then I need to invest RM 20,000 or in other words hire 10 salespeople! It is that simple. That’s my marketing budget.

Here is the Second area to look at in putting a marketing budget together:

2. Lifetime Value

This, to me, is one of the most powerful and best kept secret in business! Knowing your
client’s lifetime value to the exact possible cent can explode your profits in unimaginable
ways!

Lifetime value is basically the amount of profit you make per client (less all related
expenses) over their lifetime of doing business with you. Let’s suppose a client stays with
you usually for 3 years only and spends on average RM 49 085 during that time. Also let’s
say, once you take out all your costs in servicing that client over the 3 years and take out
your product costs, you’re left with a 37% profit margin. This would be your calculation:

(A) Total Revenues over 3 years of a customer since the beginning = RM 49 085
(B) Average Margin = 37%
Lifetime Value = (A) x (B) = $ 18 162

An AMAZING point:

Ask yourself this, how much are you willing to invest, per customer to grow your
business? Let’s say you are turning in Profits of RM 18 162 per customer, would you be
willing to spend more than RM 30 or RM50 or RM 681 or RM 10,000 to acquire a new customer?And how much would you spend on Customer Service to secure these clients for longer periods and more revenues? Basically this means that you can spend up to $18162 on
acquiring AND keeping this client BEFORE you lose profit!!!

In the previous example let’s now use the Newspaper Ad example again. Initially the campaign looked like a loss making campaign as the RM 4000 invested brought in only RM2000 in profits from the 2 customers resulting in a net loss of RM 2000. But what if on average a customer stays with you for 10 years and spends a total of RM 5000 per year in profits? That’s RM 50,000 in 10 years. So although they appeared to be losses initially, taking Lifetime Value into your calculations they actually are profitable in the long term. This means your business can afford the small initial campaign loss for the bigger long term profits.

So next time you plan to set up a marketing budget, get together with your team and do some research as to how much your Acquisition Costs and Lifetime Values are per customer and you can make some very intelligent decisions. Drop me an email if you are really stuck in working all this out and I will have someone on my team to give you a hand.

Remember this: Business is mathematics. And knowing the maths behind your marketing and using it accordingly can make you massively rich!

Have a profitable year!
Jeevan Sahadevan
www.facebook.com/jeevansahadevan