The Expert Podcast

So, as a business owner, small or large, how much should you spend on marketing? What should your marketing budget be? What should your marketing expense be? You're going to have to face this question many times, sometimes many times per month because you're going to be approached by marketing and advertising companies that want to sell you some product or service that has a cost. You need to know how much to spend. In fact, sometimes they'll ask you, "What is your budget? How much is your marketing budget? How much do you have to spend?"

That's a sales question. We'll talk later about why that's not a good question to ask and why, if you're asked that question, you might want to respond to it in a certain way. Even without being presented with advertising sales pitches, you still have to decide how much to spend on your marketing campaigns for your business. You have to figure out if you're going to do Google ads, Facebook ads, print, postcards, electronic media, XM radio—there's a lot of options out there.

You have to do something. If you don't do any marketing, you're not going to have any sales, right? All of your sales come from people who have found your business and bought something. So, how much do you spend? Well, here's the thing: if your marketing produces business, you should spend as much as you have. Spend a million dollars on marketing if it turns into business. If the marketing is not turning into business, then don't spend anything until you find something that does.

Remember the benchmark: 8X. What does that mean? Anything you spend money on for your business shows up on your P&L (profit and loss) as a business expense. However, you should not look at anything you spend money on as an expense—it's either wasted money or it's money you spend to get more business. If you spend $100 on something, it’s getting you more business or it’s required to fulfill the business you already have.

For example, having a bookkeeper doesn't necessarily get you more sales, but it allows you to process the sales and business you already have. In effect, it enables sales. Marketing is a little different. Marketing is designed to get more business—future business, increased business, business development, as it's sometimes called. So, if your sales are at a certain number and you want it to be higher, you do marketing.

Let’s use a hypothetical example of a business that does $1 million per year in sales. It could be any number—$100,000 in sales or $10 million in sales—but let’s use $1 million because it’s easy to do math. If you have a business that does $1 million in sales and you want to do more sales, you need to do marketing. That marketing could come in the form of things you pay for or even free marketing like content marketing—creating content so people find your content, then they find you.

Don’t confuse marketing with sales. Marketing is to get people to come to you, contact you, or inquire about you. Sales is converting those contacts into transactions. Marketing gets the eyeballs. So, if you want to increase your sales, you might say, "Well, I’m going to spend $2,000 a month on marketing. $2,000 more a month on marketing." Okay, $2,000 a month—how much sales is required to make it worthwhile to spend that $2,000?

That’s the trick question. You might say, "Well, if I make $2,000 in sales, it paid for itself." That’s not true. In a business that sells $1 million annually, how much net profit exists? Most businesses operate on about a 20% profit margin. Some businesses are a little less—maybe 10% or 15%. Some more technical businesses might be 25% or even 30%. Let’s use 20% as a benchmark. If you sell $1 million and keep $200,000 at the end of the year (20%), that means you need to sell five times in sales revenue (top line) to keep 1/5th of that on the bottom line.

So, your $2,000 in marketing you spend this month needs to generate $10,000 in sales just to pay for that $2,000. By the time you pay all your expenses—cost of sales, materials, sales commissions—at the end of the day, you only have $2,000 left over to pay for the marketing. So, you broke even. And you don’t want to break even because then you did all that work for nothing, right?

Instead of five times, what if you did 8X? If you do 8X, that gives you a little bit of a margin, a little bit of padding because some things you try for marketing aren’t going to work, and you won’t know until you try. Some things are more speculative. So, if you take your marketing budget and multiply it by 8, that’s how many new sales dollars you need to generate.

For example, $2,000 in marketing per month (whether it’s sending postcards, advertising on TV, etc.) needs to generate $16,000 in new sales from that marketing. Also, remember, if your marketing campaign takes time to get results—say three months—you need to account for those three months of expenses and add them back in. Using 8X makes the marketing sustainable in the long run. If it doesn’t pay for itself, you’re just wasting money.

With marketing, you’re not going to know in advance if it’s going to work. You have to make an educated guess. You can’t just throw money at things that don’t make sense. Some things you thought would do well won’t, and some things with a low probability may do great. Start at a relatively low number that’s reasonably productive. Once you find something that works, how much should you spend? As much as you can.

For example, instead of spending $2,000 to get $16,000, spend $20,000 to get $160,000 in new revenue. Spend $200,000 to get $1.6 million in new revenue. See where that’s going? Your marketing spend should be unlimited if it’s productive. If it doesn’t produce results, it should be zero.

Marketing money is throwaway money until you get a return. There’s no such thing as a business expense—everything should be an investment in more business. Some people argue, "If my expenses are already paid for, isn’t new sales just found money?" Not really. Every sale has associated costs—materials, staffing, commissions. Even if there are no immediate costs, as your business grows, you’ll need more employees, facilities, and insurance. That’s why you need the 8X discipline.

From day one, aim for an 8X or even a 9X margin for safety. Let me know in the comments what you think about this strategy. Marketing can be speculative, and many companies profit regardless of your success. Be strategic with your marketing funds, align them with your business goals, and focus on conversions. We’ll talk about that next time.