How to calculate marketing budget?

[apricot]

Hi,

A product sale should give 30% profit.
Product Sale Price - Product Price - Amazon/Ebay(whatever) fee- Postage = should be 30%

Would it be reasonable to add marketing costs as 2%, 5% or 10% to each product to have a budget for Marketing?
What I mean by marketing is only Amazon advertising by the way.

 

[SEODEV#338055]

It's whatever you need to sustain whatever it is that you're doing

What do you need?

 

[apricot]

It's whatever you need to sustain whatever it is that you're doing

What do you need?

How much should I spend on marketing ?

Not sure what I need to sustain but I know I don't want to spend more than what I should be earning but what's the calculation for that?

 

[japancool]

How much should I spend on marketing ?

Not sure what I need to sustain but I know I don't want to spend more than what I should be earning but what's the calculation for that?

You work out what the return you expect from that marketing is, and then you decide if it's worth it.

If your marketing is 50% of your gross profit, but it increased your sales by 500%, then it would be worth it.

 

[Deleted member 335660]

You are starting at the wrong point. Your spend on marketing depends on what you need. If you are launching a business it could be 10%, if you are a profitable business and just need to keep things going it could be 2%.

We started a shop and I budgeted £2,000 which after our first year (Covid Year 2020) turned out to be 5%.

You need to sit down and work out what you would like to do, what it might cost and then decide if you can afford it. Then you go back to refine it in light of your financial situation.

Startup budgets tend to be greater as you need to make people aware you exist and invest in promotional banners, literature, Social Media Tools etc.

 

[Mark T Jones]

It's far too broad a question to answer properly however when it comes to forecasting my advice is this:

1. Get hold of a fairly simplistic template (there is a free download one on my website, or many other sources)

2. Fill in the numbers you are reasonably sure of.

3. Fill in the other numbers - literally just put a number in the box.

4. Go back and challenge/question the numbers you have put in boxes (including the ones you are sure of). They will gradually make sense and become realistic.

5.once you have a clear insight to your costs and returns you can juggle your budgets and returns ad nauseum

6. Rinse and repeat constantly.

If your start up and fixed costs are low you can do this whilst getting onand selling stuff

 

[apricot]

You are starting at the wrong point. Your spend on marketing depends on what you need. If you are launching a business it could be 10%, if you are a profitable business and just need to keep things going it could be 2%.

We started a shop and I budgeted £2,000 which after our first year (Covid Year 2020) turned out to be 5%.

You need to sit down and work out what you would like to do, what it might cost and then decide if you can afford it. Then you go back to refine it in light of your financial situation.

Startup budgets tend to be greater as you need to make people aware you exist and invest in promotional banners, literature, Social Media Tools etc.

You made my mind boggled! Never thought this way and it totally makes sense!
Thank you

 

[apricot]

It's far too broad a question to answer properly however when it comes to forecasting my advice is this:

1. Get hold of a fairly simplistic template (there is a free download one on my website, or many other sources)

2. Fill in the numbers you are reasonably sure of.

3. Fill in the other numbers - literally just put a number in the box.

4. Go back and challenge/question the numbers you have put in boxes (including the ones you are sure of). They will gradually make sense and become realistic.

5.once you have a clear insight to your costs and returns you can juggle your budgets and returns ad nauseum

6. Rinse and repeat constantly.

If your start up and fixed costs are low you can do this whilst getting onand selling stuff

Finance forecasting doesn't really help me because I see my numbers growing but I can't really figure out if it is because of my marketing budget or natural growth.

On Amazon ads or Google, it tell you what you spend what you sell but I can't figure out what should be the ratio. If you spend £100 and sell £200, is that ok or min sell should be £500 or whatever .. if so, how to calculate how to get min expected number? Trevor made a great point though, I'll work on the reports a bit more and figure it out.

 

[AlanJ1]

Finance forecasting doesn't really help me because I see my numbers growing but I can't really figure out if it is because of my marketing budget or natural growth.

On Amazon ads or Google, it tell you what you spend what you sell but I can't figure out what should be the ratio. If you spend £100 and sell £200, is that ok or min sell should be £500 or whatever .. if so, how to calculate how to get min expected number? Trevor made a great point though, I'll work on the reports a bit more and figure it out.

It's what you want it to be or what a product level can afford to be.

1/3 of my range makes 65% profit.
1/3 75%.
1/3 100%.

I know on my 100% items I can spend more than I can on my 65%.

If I am advertising all services then depending on fast sellers or slow sellers I know a medium point on what I can spend to get to where I want to be.

I know on Google or Amazon, if I spend £100 to get £200 I make a profit, but it's not enough to keep me happy.

 

[Chris Ashdown]

When I made my business plan i decided on 10% of expected turnover to be spent on Sales and Marketing, after three months trading we were able to have the numbers so we could anylise and adjust the numbers based upon data rather than gut feelings

 

[Financial-Modeller]

How much should I spend on marketing ?

Not sure what I need to sustain but I know I don't want to spend more than what I should be earning but what's the calculation for that?

Bear in mind that there probably will not be a linear relationship between advertsing spend and profit.

Slightly different questions for you:

1. what's stopping you selling 10 times as many units as you do now? If the answer is not supply or logistics, then
2. if you spend 10 times as much on advertising, will you sell 10 times as many units?

 

[apricot]

It's what you want it to be or what a product level can afford to be.

1/3 of my range makes 65% profit.
1/3 75%.
1/3 100%.

I know on my 100% items I can spend more than I can on my 65%.

If I am advertising all services then depending on fast sellers or slow sellers I know a medium point on what I can spend to get to where I want to be.

I know on Google or Amazon, if I spend £100 to get £200 I make a profit, but it's not enough to keep me happy.

Thank you so much for your reply.

I do spend more on the products that have a better conversion rate as all I need is to get more exposure. Even for those, I find it hard to calculate the budget but I think I beginning to understand how to manage it.

 

[apricot]

Bear in mind that there probably will not be a linear relationship between advertsing spend and profit.

Slightly different questions for you:

1. what's stopping you selling 10 times as many units as you do now? If the answer is not supply or logistics, then
2. if you spend 10 times as much on advertising, will you sell 10 times as many units?

I liked the second point.
I wish 10 times more spending results with 10 times more sale.
Some weeks I spent £100 and get £150 worth of sale and for the same product some weeks, I spent £20 and £200 sale. Sometimes customers like browsing, sometimes they are ready to buy I guess.

 

[makeusvisible]

So many people start a web-based business without asking this question. So big kudos to you!

The bit of information you are looking for, to calculate this figure properly is... Cost Per Conversion.

What is cost per conversion? (you might be asking)
It's the amount of money it costs you to generate a sale.

How do you know your cost per conversion?
As a new startup... you probably don't. However, what you should do, is have a target cost per conversion, which sits within the budget of your margin.

Example
Imagine you buy a product in at £100, and your going to be selling it at £150, you have a margin of £50 on the product. So not taking into account your other expenses, your cost per conversion needs to be less than £50.

i.e to generate a product sale on your website, your cost per conversion needs to be under £50.

As a startup, you should set a target cost per conversion that is realistic. It is more than possible that on day one, that cost per conversion is going to eat significantly into your margin. There is absolutely no point in having a product margin of £50 to play with and setting a target cost per conversion of £5. It simply isn't going to happen.

What impact your cost per conversion - and marketing spend?
So there are some factors within your control;

Your price - How much your charge customers, and how competitive that is in the space. Price is often still king.

Your website - If your website works well, has great imagery, an easy checkout, and presents your brand properly, it's going to convert better. eg a website that converts at 2% is going to need double the marketing budget of one that converts at 4%

And outside your control (somewhat)

Competition - When it comes to paid ads across Meta or Google (for example), competition will drive the cost of ads.

Some example

Imagine you are buying products for £100, and selling for £150.
Now imagine the average cost per click for a Google Ads campaign is £1
Finally...imagine your website coverts at 5%

That means, for every £1,000 you spend you get 1,000 website visitors
For every 1,000 visitors, you gain 50 sales
For 50 sales you have £7,500 revenue

Your 50 products cost £5,000, and sold for £7,500, and you spent £1,000 on the Ads, making £1.5k profit.

Therefore, your cost per conversion was £1,000 / 50 = £20. So now you can scale things up, spend more on Ads and aim to maintain £20 per conversion.

Important points

The whole concept of running online ads is that the results are tangible. Unlike newspaper or radio ads, for example, you can see who had sight of the ads, where they lived, sometimes how old they were, what your click-thru rates are on different types of ad creative, and how different pages of your site perform in terms of conversion rates. However, unless you react to this data, and run the campaigns properly, you are never going to see improvement.

Don't expect to achieve a good conversion rate, or results, with a minimal budget. If your spend £100 on ads as opposed to £1,000 it is going to take you 10 times longer to gain data and to be able to make informed decisions about improvements.

Know your competitors and know your own website. Try to gain insight into their marketing spend, and on the performance of your own website before you set goals. If your competitors have spent thousands on product or service photography, and have a slick perfect website.....and you have a wix site, you cannot expect the same level of performance, customer engagement or conversion rates, and that is going to impact the required marketing spend.

Hope that helps.

 

[fisicx]

I liked the second point.
I wish 10 times more spending results with 10 times more sale.
Some weeks I spent £100 and get £150 worth of sale and for the same product some weeks, I spent £20 and £200 sale. Sometimes customers like browsing, sometimes they are ready to buy I guess.

This is where you need analytics. You look at where visitors came from, where they landed, what they did, why they left. You look at pages with a high bounce rate, time on page, device they used, their location and so on.

With all this information to hand you can start work on improving conversions.

 

[SportsExpert]

This is where you need analytics. You look at where visitors came from, where they landed, what they did, why they left. You look at pages with a high bounce rate, time on page, device they used, their location and so on.

With all this information to hand you can start work on improving conversions.

I would agree with this and this is on point. On these metrics, you can determine the cost of your marketing budget in every aspect. However, it's also important to know your limits when it comes to your capabilities on the needed campaign and improvements.

 

[Paul FilmMaker]

We have a different, slightly strange way of looking at things.

1. An employee, full time marketer (she's brilliant)
2. Marketing events / email marketing, social and misc
3. Sales collateral.

We need about £40k cash to run all of that for a year, properly. So marketing has to bring in £40k of profit. If it generates double or triple that, then marketing get a ton more money and bonuses.

We can do this because we're a small business so marketing's involvement is clear.

 

[fisicx]

@Paul FilmMaker that’s because you are doing it right. Marketing is an investment not an expense. Too many businesses don’t see the point in spending money on marketing because they see it as a loss to the business.

 

[UkAppCoder]

Hi,

A product sale should give 30% profit.
Product Sale Price - Product Price - Amazon/Ebay(whatever) fee- Postage = should be 30%

Would it be reasonable to add marketing costs as 2%, 5% or 10% to each product to have a budget for Marketing?
What I mean by marketing is only Amazon advertising by the way.

Hi @apricot.

If I understand your question correctly, then I can't see any way that you're going to find a magic percentage constant to help you.

However, the following formula will give you a marketing budget from your 30% profit requirement, ProductSalePrice and Costs. I started with your equation:

ProductSalePrice (p) - Costs (c) - MarketingBudget (m) = 0.3*ProductSalePrice (p)

... and did a little algebra to make MarketingBudget the subject. The formula is:

m = 0.7p - c

Examples:

m = 0.7(100) - 70 = 0 // Marketing budget: £0

m = 0.7(120) - 70 = 14 // Marketing budget: £14. Will the market tolerate a price of £120? Check out your competitors' prices. See [1] below.

m = 0.7(9) - 8 = -1.7 // Marketing budget: -£1.70. Not feasible.

m = 0.7(437) - 184 = 121.9 // Marketing budget: £121.90. Will the market tolerate a price of £437? Check out your competitors' prices. See [1] below.

[1] If your price is generally higher than that of your competitors, then would you be able to increase your costs a little in order to improve your product to make it better value for money than that of your competitors?

Here's how I derived the formula from the information you gave:

ProductSalePrice (p) - Costs (c) - Marketing Budget (m) = 0.3*ProductSalePrice (p)

0.3p = p - c - m

0.3p + m = p - c

m = p - c - 0.3p

m = p - 0.3p - c

m = p(1 - 0.3) - c

m = 0.7p - c

As you can see, I simply added a marketing budget variable to the costs, then compressed the other costs into a single variable Costs to simplify the initial equation in order to make the algebra a little easier. I assumed you wanted a profit of 30% of the ProductSalePrice.

Perhaps one of your analytics apps has a similar calculator which might help you. If not, then on Google Play, I have an app consisting of various calculators, each of which take minimal input. If you (or anyone else) would like me to add this calculator to my app, then just send me a PM and I should be able to get it done this week. The calculator above would require you to provide only the ProductSalePrice and Costs, but other inputs are possible to make the formula more versatile.

You can check the formula with an intermediate equation .

Hope this helps.

 

[MOIC]

Hi,

A product sale should give 30% profit.
Product Sale Price - Product Price - Amazon/Ebay(whatever) fee- Postage = should be 30%

Would it be reasonable to add marketing costs as 2%, 5% or 10% to each product to have a budget for Marketing?
What I mean by marketing is only Amazon advertising by the way.

A good thread to read with some in-depth answers and a great attitude from @apricot

My advice is to add 10% (if it's possible to remain competitive) towards your marketing cost and analyse figures on a monthly basis. There will be variables for you to take into account.

Love those Algebra equations!

 

[apricot]

Hi @apricot.

If I understand your question correctly, then I can't see any way that you're going to find a magic percentage constant to help you.

However, the following formula will give you a marketing budget from your 30% profit requirement, ProductSalePrice and Costs. I started with your equation:

ProductSalePrice (p) - Costs (c) - MarketingBudget (m) = 0.3*ProductSalePrice (p)

... and did a little algebra to make MarketingBudget the subject. The formula is:

m = 0.7p - c

Examples:

m = 0.7(100) - 70 = 0 // Marketing budget: £0

m = 0.7(120) - 70 = 14 // Marketing budget: £14. Will the market tolerate a price of £120? Check out your competitors' prices. See [1] below.

m = 0.7(9) - 8 = -1.7 // Marketing budget: -£1.70. Not feasible.

m = 0.7(437) - 184 = 121.9 // Marketing budget: £121.90. Will the market tolerate a price of £437? Check out your competitors' prices. See [1] below.

[1] If your price is generally higher than that of your competitors, then would you be able to increase your costs a little in order to improve your product to make it better value for money than that of your competitors?

Here's how I derived the formula from the information you gave:

ProductSalePrice (p) - Costs (c) - Marketing Budget (m) = 0.3*ProductSalePrice (p)

0.3p = p - c - m

0.3p + m = p - c

m = p - c - 0.3p

m = p - 0.3p - c

m = p(1 - 0.3) - c

m = 0.7p - c

As you can see, I simply added a marketing budget variable to the costs, then compressed the other costs into a single variable Costs to simplify the initial equation in order to make the algebra a little easier. I assumed you wanted a profit of 30% of the ProductSalePrice.

Perhaps one of your analytics apps has a similar calculator which might help you. If not, then on Google Play, I have an app consisting of various calculators, each of which take minimal input. If you (or anyone else) would like me to add this calculator to my app, then just send me a PM and I should be able to get it done this week. The calculator above would require you to provide only the ProductSalePrice and Costs, but other inputs are possible to make the formula more versatile.

You can check the formula with an intermediate equation .

Hope this helps.

m = 0.7p - c - Brilliant!
- I think this is the formula I was looking for! I'll try my numbers with this formula and see where it takes me to.
Thank you so much! ???

 

[UkAppCoder]

m = 0.7p - c - Brilliant!
- I think this is the formula I was looking for! I'll try my numbers with this formula and see where it takes me to.
Thank you so much! ???

I hope it works for you.

By the way, if you want to vary your 30% profit requirement when doing your analyses, simply replace the 0.7 constant with (1 - r) where r is the required proportion of ProductSalePrice. So the new formula would be:

m = (1 - r)p - c

So, in addition to the providing values for p and c, you would also need to provide a value for r which would have to be between 0 and 1 inclusive, i.e. 0 <= r <= 1.

This would make the function more versatile.