It’s a new year and we know that most businesses are online today due to the Covid-19 pandemic. Despite the pandemic, we’re all excited to grow our business in 2021
And one of the most common questions we’re always being asked is:
How much should I invest in digital marketing in 2021
Well, our answers might not be the same as others…
Because there are various ways to decide how much you should invest in digital marketing.
How much you should allocate for your digital marketing budget?
This is one of the most common and easy ways to do it. Just take 10% of the total revenue you made last year and allocate it for digital marketing efforts.
Let’s say you made RM200,000 last year, then your digital marketing budget for this year should be RM20,000
But the drawback of using the 10% method is that it limits the growth potential of your business.
Just pause a moment.
Think about this, what if you’re able to invest more than 10% of your previous year’s revenue? How about increasing your digital marketing budget by 30% or 40%? How if the return your get at the end of the year is 10x the amount you invest?
Although it may be risky, we will show you how to reduce your risk by playing it safe. We will use a methodical approach in scaling your digital marketing budget.
How to Calculate How Much You Should Invest on Digital Marketing
This is the exact formula we’ve used for our agency and our clients. So, let’s get started.
Digital Marketing Budget = CAC (Customer Acquisition Cost) x Number of Customers You Want
This is the best way to accurately calculate how much you should allocate for digital marketing efforts. As shown above, CAC is Customer Acquisition Cost, and this blog post going to focus on how to find out the maximum amount you can spend in acquiring customers.
There are a few questions you need to answer to determine the cost.
This will help you out to determine how much you should invest in your digital marketing in 2021. So, let’s move on.
Top Questions to Help You Calculate Digital Marketing Budget
Question 1: How much time will you spend in implementing digital marketing for your business?
One of the most important questions that you need to ask yourself. If you don’t have enough time to spend on digital marketing, you need to hire someone or an agency to do it for you.
These are the options you should consider when hiring:
- You can hire a full-time or part-time employee. Someone with at least 2-3 years of experience. You should look at RM2,500 to RM5,000 depending on their experience and skillset.
- You can hire a digital marketing agency like Magnes Marketing, and our price starts from RM2,000/month.
- You can hire a freelancer with varied pricing. You’ll need to spend at least RM80 -RM100/hour for the right ones.
There are advantages and disadvantages to each option.
For example, if you choose to hire a freelancer, you might not get the results you expect. Just a service provider trading their time for the money. Some freelancers are dedicated to getting results for the business they work for but in most cases, you might not get what you’ve wanted.
On the other hand, when you hire an employee, you need to spend time in training. If you don’t have an existing in-house digital marketing team, you might need to hire 3 to 4 people to form a digital marketing team. If you’re a small or medium business, you might not have enough budget to hire a full-fledged digital marketing team.
If you choose to do digital marketing on your own initially to have a healthy cash flow, it is ok. But make sure that it does not affect your efforts in other parts of your business like the operations etc.
Just make sure you’re using your time and energy to produce the best results. You don’t want to end up looking back with a regret of wasting your time and money by trying to do everything on your own. Even if you’re making a thin profit margin from your business, hiring someone experienced to take care of digital marketing can help you reduce your unwanted expenses.
Now that you know how to spend your time wisely in digital marketing with few options, let’s learn how to find the maximum customer acquisition cost you can allocate in acquiring customers.
Question 2: What is the Customer Life-Time-Value (CLV) of your customer?
CLV or Customer Life Time Value is the amount of revenue or the value your business will get from your customers over a lifetime. It means how much the customers will be spending on your products and services continuously in their lifetime.
For example, the CLV of a person purchasing a toothpaste brand is high because just think about how much toothpastes an individual will purchase in their lifetime. Moreover, the number of people that often change toothpaste brands is extremely low.
And that’s why it’s important to know the CLV of your products and services as it will help you scale your digital marketing budget.
The formula for calculating CLV looks something like this.
CLV = (AOV x Gross Profit Margin x Purchase Frequency)
Usually startup companies with huge investments or financial backing, they can sustain a loss to acquire customers.
Sometimes businesses that spend more than their profits and make a loss initially in acquiring customers, will make more money from their customers in the long run.
Now you know the importance of CLV. We will look at other important calculations in the next question.
Question 3: What is the forecasted AOV for your business?
AOV or Average Order Value is the average price your customers need to pay for your products or services.
If you have one product that is priced at RM50, then your AOV is RM50.
Let’s say if you have multiple products or different services offered, then you will need to do extra work in calculating the AOV.
One of the best ways to calculate AOV is by looking at historical data of the business revenue.
If you’ve been in business for yours, try to dig up some historical data that provides total revenue divided by the number of total clients.
If you’re just starting, you can try forecasting AOV by finding out the products and services that have the most demand and calculating the average order value.
Try adjusting your forecast once you start getting more data on revenue and the number of clients.
Question 4: How many times my customers are purchasing my products and services?
Is your product a one-time purchase without any cross-selling like real estate properties?
Is it a digital marketing service with a monthly retainer?
Is this a product or service that is high in demand and gets continuous order?
Once you determine this, it will help you get the CLV value easily as we discussed earlier.
If your product or services need to be order repetitively, the stronger the CLV. Just imagine if someone needs to purchase your product a hundred or thousand times. That will increase the CLV
Think about Nestle products, Milo for example.
Their goal is to encourage children to drink chocolate drinks and use sports-related ads to show that the children could be active and energetic. They tend to nurture them since young. This helps Nestle to increase the CLV of their customers and spend a huge amount of money on advertising. They know that their customers will repetitively purchase their products.
Following are the complete calculations to determine how much you should allocate for digital marketing efforts:
CLV = AOV x [Purchase Frequency x Gross Profit Margin x Customer Lifespan)
Max CAC Formula:
CAC = Average Order Value -[ Cost of Goods Sold + Overheads + Profit]
Digital Marketing Budget Formula:
Digital Marketing Budget = CAC x Number of Customers You Want
Using this digital marketing budget formula, you’ll be able to have better risk tolerance and avoid burning your marketing investment.
Example on Calculating A Digital Marketing Budget
Let’s use all the formulas that we’ve listed above with a simple example of how much you should invest in digital marketing.
We will use the minimum numbers here.
So, let’s say Company XYZ has an average order value of RM100, and the customers tend to purchase their products 3 times a year.
This shows that their customer value is RM300 for one year. If you’re a new business, you can focus on a one-year digital marketing budget.
But for this example, company XYZ has been around for years and they know that their customers will continuously purchase their product for at least 3 years. We will assume the gross profit margin to be 60%.
CLV Calculation for Company XYZ
1 year: RM100 (AOV) x 3 (Customer Purchase Frequency) x 0.6 (Gross Profit Margin) = RM180
5 years: RM300 (AOV) x 5 (Customer Purchase Frequency) x 0.6(Gross Profit Margin) = RM900
Now, we have the CLV value, let’s calculate CAC.
Max CAC Calculation for company XYZ
Let’s say company XYZ has a profit margin of 10%, then the Max CAC would be:
RM100 -[RM20+RM20+RM10] = RM50
Digital Marketing Budget Calculation for Company XYZ
In this example, we assume that company XYZ wants to acquire 200 new customers.
Then you should expect to spend:
200 (Customers to acquire) x RM50 = RM10,000 (digital marketing budget)
If you manage to acquire one customer at RM50, then you will be making a good profit if the customer continuously purchases your products and services as they have a maximum lifetime value of RM900.
You might wonder why we are calculating CLV as CAC is enough to determine the digital marketing budget. Well, you need to know that it’s easier to encourage your existing customers to repetitively purchase your products rather then having to acquire new customers over and over.
The digital marketing budget can be adjusted depending on the profit margin and the customers you’re looking to acquire.
From our experience running digital marketing campaigns for our clients, they will get more customers compared to their initial forecast which on the whole reduces the CAC and increase profit margin.
This is how businesses that focus on digital marketing tend to make better ROI compared to the ones that are still comfortable with traditional marketing campaigns.
That’s it! We hope this blog post will help you allocate the right budget for your digital marketing campaigns this year.
If you want to maximize your return from digital marketing investment, choose the right digital marketing companies to work with. Rather than doing guesswork, an agency can help you develop strategies that will help you get the most out of your digital marketing investment.
Have you allocated your digital marketing budget for 2021?
Share your thoughts by commenting below.