I am often asked the question about how much does a business have to spend on Online Marketing, and it is really quite a difficult one to answer and really does depend on a better question in the first place (a bit like a Hitch Hikers Guide to the Universe, you know ’42’).
The reason the question is so important is that it is the ‘way’ that you want to do your online marketing that drives the cost issues. If you choose Adwords (Pay Per Click) for example, the cost is decided by the cost of the keywords per click and the number you need in order to make a sale (conversion rate), all of course assuming you can make a profit selling via that channel and just simply not line Google’s ample pockets (there is an excerpt from an excellent article on this below).
On the other hand, if you want to get your customers via the Organic listings on the Engines, then the cost is going to be more to do with the amount of work you need to do on the site’s pages (and the content!) and the number of links you need to ‘acquire’ in order to get to that coverted first page position (for your chosen keywords).
Likewise using Social Media. This is an area fraught with issues when it comes to marketing, as you cannot just go out and ‘sell’ in this arena, instead you have to make friends with lots of people (just like Networking) and then gently introduce the fact that you could help them / sell them something. This takes time and lot of time in fact and if you chose this route then be prepared to spend a lot, if only of your time…
Are you promoting a product online with a finite budget? Or maybe you need to follow a measurable marketing plan at your larger company? Imagine you have $5,000 per month for online marketing – how do you go about spending this?
Boil It Down To One Customer
Let’s say, I am selling a software product for $100 per month subscription. How much would I pay for a new additional customer? In other words, if I can simply pay to acquire another 40 or 50 customers per month, what would I be willing to part with?
To answer this, you should calculate the “Life Time Value” (LTV) of your paying customer. In other words, how many months does one customer continue paying the $100? If the answer is 5 months, then your LTV is $500. Of course, to earn $500 you would not spend more than this amount on acquiring a customer.
There are lots of equations, depending on the product, to derive the ideal acquisition cost. But I believe the situation is different for everyone. For example, in venture-funded software companies, or newer ecommerce companies, folks spend an insane number of dollars to acquire customers (at first), because they are trying to capture a large portion of the market and create their brand name. In other cases, there is stiff competition in what you are pursuing, and thus you will need more marketing muscle.
However, my view is simple – you should spend what you are comfortable with. I will be chewed out by analysts and math geniuses for suggesting this approach, but I have my reasons.
Unless you have a strongly defined goal, such as, “I need 1000 paying customers to launch the phase 2 of my idea,” you should spend based on:
1.) The cash you have available for the next 12 months
2.) all other costs that you have to account for, from the $500 revenue per customer
Of course, not all costs are variable (on a per customer basis), but you should assume that you are not going to acquire 10X customers in the next couple months.
The full article, which can be found at http://www.businessinsider.com/online-marketing-how-much-to-spend-2012-7, and is well worth reading, goes on to give some figures on PPC etc, and as I say is very much worth a read.