Marketing budgets can be a balancing act: either you spend too much and put yourself in a bad cash flow position, or you spend too little and no one even knows your products exist. That’s why we recommend being flexible with your marketing budget as a way to stay agile, on top of your marketing efforts, and prepared to scale as your business grows.
The Small Business Association recommends 7-8% of revenue should be spent on marketing, but what we see, in reality, is that e-commerce companies will spend up to 30% of their revenue on Customer Acquisition Costs.
Marketing budgets will range between 6-20% of a company’s gross revenue. Newer companies, and companies with less than $5 million in gross revenue, will spend on the higher end of that scale, whereas established companies with much higher gross revenue can afford to spend on the lower end of that range.
Of course, your marketing spend will fluctuate depending on seasonality, competition and what kind of industry you are in.
Then you need to decide how you spend your marketing budget, splitting your dollars between brand development costs (which includes all the channels you use to promote your brand, such as your website, blogs, sales collateral) and the costs of promoting your business (campaigns, advertising, events).
Unless they were born from brick-and-mortar businesses, e-commerce companies have, by their virtue, not been around long enough to know consistent results. Therefore, flat marketing budgets don’t necessarily make the most sense.
Digital Marketing Strategy
In their most recent survey, cmosurvey.org found that internet sales as a percentage of revenue in 2020-2021 were at 19.4%, the highest in a decade, and that there was an 11.5% increase in digital marketing budgets.
The question we see most often is simple enough, though: what percentage of sales should we, as an e-commerce company, spend on marketing?
There are a lot of ways to spend your money on marketing, and it takes a lot of strategy, research, and analytics to determine how to allocate the spend between different channels and optimize your promotional campaigns so they are effective.
So, before you begin throwing your entire marketing budget on Facebook Ads, answer the following questions and develop a big picture strategy for your marketing campaign.
1. Where is your audience?
Different demographics exist on different parts of the internet, and they are constantly changing platforms. Make sure that you know where your audience is as well as where they are most likely to respond to your marketing efforts.
It doesn’t make sense to sell products on LinkedIn, so why would you put your social media budget there?
2. What are your goals?
Are you trying to hit your sales quota, a customer acquisition goal or generate a certain number of leads for your salespeople?
Each goal requires its own strategy and should be read alongside part one: where is your audience, and what are you asking them to do?
3. How much can you afford to spend to acquire a new customer?
There are calculations at the end of this blog to help you determine Customer Acquisition Costs (CAC). If you’re investing in your marketing efforts, then you should know how much you are willing (and able) to spend on acquiring a new customer. This will help you grow and scale, and keep your advertising partners accountable.
How Should I Allocate My Digital Marketing Budget?
Even e-commerce businesses should diversify their marketing spend so that they don’t purely exist online and especially not just on one channel. Determine whether more traditional marketing placements suit your audiences, goals and budgets. That includes, but is not limited to, TV, Print, Radio and traditional PR.
For digital marketing, there are still a variety of channels to consider, and your budget shouldn’t go just towards one; be specific and intentional about where you choose to put your money. This could include:
- Paid Search
- Direct Mail
- Affiliate Marketing
- Content Marketing
- Social Media
- Product Listing Ads
On average, e-commerce brands spend 10-24% of their budget on SEO and 29-57% on PPC (39-81% combined); companies with an average of $1 million in revenue spend up to 81% of their marketing budget on SEO and PPC combined. Larger brands ($100 million-plus average turnover) spend more than a third (39%) of their entire marketing budget on SEO and PPC.
For some back of the napkin math, if you’re an e-commerce brand that revenues $1 million, you should be spending around 10% of that on marketing. Of that $100,000 marketing budget, $24,000 might be spent on SEO and $57,000 on PPC, and the other $19,000 should be spent on other marketing channels.
Where to Start With Your Digital Marketing Budget
Develop a Strategy
Get tactical about how you allocate your budget, which marketing channels you will target and how you will determine success. Marketing isn’t all about sales or even awareness; it’s about creating customers that will have a long engagement with your brand.
As I outlined above, know where your audience is active, define your goals and determine how much you can afford to spend to generate those results.
Communicate your strategy to acquire those customers to your sales team who might know best which customers are more valuable, where they are, and what messaging they are likely to respond to. You don’t just want to grab their attention but their indefinite business as well.
Use Analytics to Measure Success
The benefit of doing business online is that you are able to track and measure online activity very easily. There are plenty of benefits to using Google Analytics and Facebook Analytics not only on your website but as part of your marketing strategy.
You want to know which channels provide the best results, where you’re acquiring new customers and what gets high-value repeat customers returning.
Adapt and Repeat
Strategies don’t always go to plan, and the online environment is always changing. It’s vital to react to the information you have available to you with a solid analytics structure to guide you.
But Doesn’t Marketing Drive Revenue?
For many new businesses, the catch-22 for allocating a marketing budget is that they have some revenue (and a lot of optimism) but not the profit to reinvest into marketing. So, how do you scale?
The answer is that you need to have some organic momentum building to help you compete in a competitive market, and that can take time. Initial marketing efforts should be spent towards establishing your brand using digital PR, affiliate marketing, SEO and even influencers. These are ways to build trust and authority for your website that will endure, and borrow from the credibility of the brands and influencers that you partner with as you establish your own.
You can’t expect to turn on one channel and see instant results. Marketing costs dramatically fluctuate as competitors out-bid you in different spaces at different times, and knowing your baseline revenue growth is essential before establishing a marketing budget. And though we recommend a marketing budget of 7-12%, there are instances where you can break that rule.
Considerations for a Healthy Marketing Budget
Some companies that exist in super competitive areas should expect to spend more – up to 30% of total revenue. E-commerce is a competitive activity given the lower barriers to entry and the seemingly limitless growth available to successful e-commerce companies.
You might have no choice but to increase your marketing spend to keep up. But go too high and you might risk your cash-flow situation, putting yourself into too much debt to operate the functional areas of your business.
If your strategy has been designed to ignite explosive growth, it can be tempting to throw more money at marketing than you can afford with the expectation that you will make it back with the profits from all the sales you make.
Abiding by principle to the lower end of the marketing budget scale, say 7-12% of total revenue, ensures you grow your business at the speed of cash, acquiring customers and having money for other departments in your business.
While new companies might need a sprint-start when entering the market, spending more competitively as they get started, a CEO planning the exit strategy (closure) of their business might want to cease most of their marketing spending and coast to the finish line.
If you’re a brick-and-mortar retailer looking to invest more into digital marketing and e-commerce, you might have more room to subsidize your digital efforts with a steady and consistent revenue at your physical business.
The sole focus of marketing is no longer just growing your volume of customers but also retaining customers and getting them to spend more money. By improving the customer experience, whether on your website, through your onboarding process, or the way you ship products, you can improve your Customer Lifetime Value (more on that below) and establish more customers through word of mouth.
Different industries spend their marketing dollars in different places. We recommend you get to know what your competitors are up to by researching information that might be available to you on industry trade association websites. This will give you an idea of the typical marketing spend in those industries and where they allocate that budget.
How Effective Is Your E-Commerce Marketing Budget?
If you want to determine how much you can afford to spend to acquire new customers and make ongoing optimizations to your marketing efforts, you need to be familiar with these marketing performance metrics and spend some time working with your analytics to determine your baselines.
Customer Acquisition Costs (CAC)
Your Customer Acquisition Costs are the costs related to acquiring a new customer. As a formula, it is expressed simply as:
Customer Acquisition Cost = Sales and Marketing Expenses / Number of New Customers
If you look at the CAC segmented by marketing channel, you can see where your marketing spend gets its best return on investment (ROI).
For example, you could spend $1000 on Facebook Ads for 100 new customers (CAC = $10), and $500 on Google Ads for 150 new customers (CAC = $3.33). In this instance, we would revisit the overall spend allocation to favor Google Ads. In the next month, if we spend $1000 on Google Ads (with the CAC of $3.33), we might expect 300 new customers and 50 new customers from our Facebook Ads campaign with a budget of $500.
By changing our budget like this, we went from an overall CAC of $6 ($1500/250) to a CAC of $4.29 ($1500/350).
Understanding the cost of acquiring a customer is a key part of optimizing your business. It is even more important to then calculate the value of the customers you acquire and optimize the margin between the customers’ value and how much you spent acquiring them.
Lifetime Value (LTV)
Lifetime Value (LTV) is a calculation that measures the value of a customer throughout their full lifespan as your customer. This is a key metric used to measure your growth as a business. It can be read alongside Customer Acquisition Costs and should be optimized as best as possible.
In all likelihood, your relationship with a customer doesn’t end at just one purchase. Knowing how many unique customers you have and the expected amount they will spend during their tenure as your customer puts into perspective the relationship of how much money you spent trying to acquire them.
Lifetime Value = Average Value of Sale x Average Number of Transactions x Retention Time
For example, if a wine shop has an average sale value of $80, and a customer returns on average 6 times a year for 3 years, the LTV = $80 x 6 x 3, which is $1440.
Customer Lifetime Value (CLV)
CLV measures the profitability of a customer by multiplying the LTV by the profit margin. It is used as a way to predict and forecast future profitability and determine acquisition targets.
CLV = Lifetime Value x Profit Margin
In the above example, if the LTV of my wine store customer is $1440 and the profit margin is 20%, then the CLV is $288.
When reading and tracking CAC, LTV and CLV together, you can get an overview of how your business is performing and improving over time. You want to see customer lifetime value grow while the costs associated with acquiring that customer shrinks.
Isolating these metrics by channel and reading them by themselves will give you a great basis for improving your marketing strategy. If you are looking at improving your LTV, I recommend reading our post How to Reduce Churn Rate.
Return on Ad Spend (ROAS)
Return on Ad Spend is a popular metric to measure in e-commerce, especially with digital campaigns where you can directly attribute sales to specific campaigns.
ROAS = Revenue from campaign / Advertising cost of campaign
While ROAS is a good metric to use when comparing the success of two campaigns with the same goals, it does not necessarily reflect the long-term viability of those campaigns and is often seen as a vanity metric.
On its own, ROAS doesn’t express the net return of a campaign after you take out product handling costs and ad management costs, and there is no way to evaluate the value of the customers you have created.
Imagine you have two campaigns that spend the same amount of money. Campaign A had a higher sales revenue and, therefore, a better ROAS than Campaign B, but the products sold in Campaign B were sold at a higher profit margin. And maybe the customers that Campaign B produced had a higher LTV than those in Campaign A; perhaps they purchased a subscription to your product rather than just one product on its own.
Return on Investment (ROI)
Return on Investment is a way of determining the returns of an investment relative to its costs and is expressed as a percentage.
ROI = (Gain from Investment – Cost of Investment) / Cost of Investment) x 100
ROI is used in all kinds of industries and is a standard, simple way of determining the profitability of different investment opportunities. It is more difficult to use in a broad way in digital marketing. Still, I have included it as a setup for showing the ROI of a lead generation campaign as many businesses operating online struggle to appreciate the Gain from Investment of leads.
ROI of Leads
If your digital marketing campaign is focused on generating leads (with a sales department responsible for final conversion), you should estimate a dollar amount (Gain from Investment) to apply to a new lead.
Gain from Investment = Number of Leads x Conversion Rate % x Conversion Value
On average, how many of your leads go on to convert, and what is that conversion value?
For example, a mortgage broker might receive 16 leads, and with a historical conversion rate of 15%, the average conversion value is $9,000. The gain in this instance would be assumed to be $21,600 (16×15%x9000).
ROI of Leads = (((Number of Leads x Conversion Rate % x Conversion Value) – Cost) / Cost ) x 100
Continuing from our example, if the cost of the lead campaign was $1000, the ROI of that campaign would use the gain from investment, and be expressed as (($21,600 – 1000) / 1000) x 100 = 2060%
The broker spent $1,000 to earn $21,600, and the ROI of his efforts were 2060%
Your Digital Marketing Budget Can and Should Fluctuate
Your marketing expenses will always fluctuate. Whether it’s because of the seasonality of the product you offer or your competition changing their strategy, you might have had a bad quarter or a great one.
Keeping your marketing budget fixed as a percentage of your business’s total revenue allows you to keep in a cash-advantaged position. It also means that you have to re-address your marketing budget when you address fiscal reports.
You can use that time to also go over key marketing metrics with your marketing team. Understand changes in customer acquisition costs and the lifetime value of your customers, and get answers about which channels are working well for your business.
There is no simple answer to the question: how much should I spend on digital marketing? But, hopefully, we have given you the tools to determine that for yourself. No one knows your business better than you.
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