What Is the Optimum Marketing Spend?William Gadea 12.20.2016
Do you worry that you’re spending too much on marketing? Or do you fear that you’re spending too little? If like me you own a business, or if you’re a marketing professional, you probably do a little of both.
What’s the best way to think about this problem? Here’s one approach.
In the chart above, you can see a number of scenarios along the bottom axis. They result in gradually escalating sales. In all these cases, the fixed costs (salaries, rent, etc.) are constant, while the variable costs (raw materials, sub-contractors, etc.) grow as the sales do.
Marketing costs, however, have a different relationship to sales than these two other cost categories. The ‘free’ marketing channels (referrals, repeat business) can satisfy the lower sales levels. As the sales targets grow, low-hanging fruit can be picked up at low cost with the most cost-efficient marketing channels. However, as demand for leads or sales grows, the per-lead or per-sale cost typically rises too. This is because you sometimes have to resort to less efficient marketing channels, but often the cost grows within the marketing channel as well. For instance, the cost of pay-per-click usually increases the more clicks you buy, because you have to bid more to get the additional traffic.
If you can calculate how much marketing it will cost you to reach different sales targets, then you will probably be able to calculate what the optimum level of marketing spending is — that is, the level of marketing spending that will leave you with the most profit.
Now, there might be good reasons not to choose this optimum marketing spend. You might want to under-shoot this target if reaching for it necessitates a growth rate that is risky, or might imperil your company culture. Or conversely, you might want to over-shoot this optimum point if you consider lifetime customer value, rather than just your coming-year returns. (This year’s new customers might be next year’s return customers.)
There is another important takeway from seeing the problem from this angle. A sales target shouldn’t simply be an aspirational goal to keep your sales force on its toes. It should be a strategic decision arrived at after a holistic consideration of your whole business: marketing, sales, and product.