Calculating your Marketing Budget

This section is going to help you to calculate the budget for your online marketing activities.

Calculate Marketing Budget

Many online sources recommend to simply use a percentage of your revenue and invest back into marketing, but this does sound a little speculative to us. You can reduce some of the guess work by calculating your budget using the formula below.

 
Note:

All online marketing activities should be bound to KPI's that will allow you to measure the return on investment.

Example:

The blue values are calculated for you, you only need to know the black values based on your past sales records:



ContextValueDescription
Goal$ 1,000,000How much do you want to sell?
Average Transation Value$ 50,000What’s the average sale?
Closing Ratio10%How many of your leads do you want to convert to sales?
Less Required200(Goal / Average Transaction / Closing Ratio)
Conversion Rate1%What is the estimated conversion rate? Conversion rate = users that take action in response to marketing efforts such as click, view, share.
Conversion Required20,000(Leads Required/Conversion Rate)
Marketing budget per sale$ 1,000How much are you willing to spend per sale.
Marketing budget Total$ 20,000(budget per sale x transaction required to hit sales goal)
Max. cost per lead$ 100(Marketing budget total/Leads Required)
Max Cost per Conversion$ 1(Marketing Budget Total / Conversions Required)

There are still a couple of additional things to consider:

  1. This calculation does not consider the customer lifetime value. This means it focuses on a single sale and does not consider that once you have converted a lead into a customer the customer may buy more products over time. Existing customers also require to be part of your marketing plan; this formula just simplifies things.
  2. Expected business growth needs to be added to the goal value.
  3. Marketing Budget per Sale needs to be constantly monitored as a drop in Closing Ratio or Conversion Rate will have an instant impact on our CPL and CPC. Example: if your closing ratio would drop to 5% in the above example you would have to double your marketing budget to keep the CPL up at $100 and meet your sales target.

The above example should give some ideas on how to calculate your marketing budget and remove some of the guesswork.

 
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