Most businesses spend some arbitrary percentage of revenue on marketing – 3%, 4%, 5% are typical percentages used. But this assigning numbers like this really doesn’t make any sense.
Instead, the smart move is to sit down and calculate the lifetime value of your average customer. The formula looks like this:
First calculate your total sales revenue for last year. Then divide that number by the total number of customers you served. Then make a best guess estimate of how long you keep your average customer. Finally, multiply the number of customers times the average sale and then multiple that number by the average number of years you keep a customer.
Base your marketing budget on that total value.
For example, lets assume that your total business revenue last year was $1,000,000. And lets assume that you served 1000 customers. Finally, lets assume that you keep an average customer about 5 years.
$1,000,000 / 1000 = $1000 x 5 = $5,000 Lifetime Value
You now know that each time you acquire a customer, you earn an average of $5,000! Now you are not flying blind. You know that in theory, you can spend up to $5,000 and still break-even on a new customer acquisition.