Chapter 2

Marketing Budget Calculation

Calculate marketing allowable

Estimate allowable funds to acquire each sale.

What can you afford to pay?

Before you begin any marketing initiatives, figure out the amount that you can afford to spend to acquire a sale. Many businesses devote a percentage of sales to their marketing budgets. No matter how you arrive at a cost-per-order goal, the exercise to review and estimate costs kicks off an ongoing process. Use the Marketing Budget Calculator to clarify costs and define the remaining allowable budget for marketing and potential profit. Do this for each product and/or bundle.

Income versus expenses

Businesses need to price products based on a thorough examination of costs to deliver a product as well as competitive, retail and wholesale environments. Whether selling at retail and/or ecommerce, consideration for the costs of goods, credit card processing, shipping and handling, inventory storage, returns, customer service, administration and any royalties make or break business success.

How to create marketing budget benchmarks

The Marketing Budget Calculator is used to determine revenues that can be applied to marketing. Marketers can also configure a combination of products to be sold in a bundle. The final calculation yields the allowable amount for marketing, comparing income versus expenses. The lower the cost to acquire an order (CPO) below this benchmark, the more profitable the enterprise will be.

Another benchmark, the breakeven ratio, compares sales to marketing costs; the goal is to achieve the largest ratio possible, greater than the breakeven ratio.

Calculate your target cost-per-order and ratio benchmarks using conservative estimates. Watch results weekly to track performance and work towards constantly improving by lowering CPO and simultaneously delivering a higher ratio.

Sample

The template includes a sample product profile which is designed to create a bundle of products for ecommerce and/or direct response advertising where the sale of the initial product is followed by “upsells,” or additional, usually related, products or services.

The assumption made in the example in the Marketing Budget Calculator spreadsheet estimates that 50% of consumers would purchase the additional product in addition to the initial offer. The total amount collected per order, on average, is $29.38. Subtracting estimated expenses from income yields $13.15. So, delivering orders for less than $16.22 generates profits. The breakeven ratio of 1.81 means that a return of $1.82 or better for every marketing dollar takes the venture in a successful direction. Get ideas for costs to include in the Example worksheet. Then proceed to start editing and using the second blank worksheet. Begin with the retail price you have already chosen based on current competitive, retail and wholesale environments. Results of the exercise may cause you to change your retail price in the event you allow too little for marketing and/or profit.

Marketing Budget Calculator

Find this worksheet with built-in formulas here.

Here are the steps to tackle the Marketing Budget Calculator worksheet:

  1. Start by recording the retail price for your product.
  2. Separately, document the amounts you charge customers for shipping and handling. 3.
  3. Insert your cost to create the finished product.
  4. Write down the average shipping fee.
  5. Enter the average handling fee.
  6. Add your costs to process a credit card transaction; 3% of the retail price is a planning rate to use until you secure your own rate from a payment processor.
  7. Estimate customer service costs.
  8. If consumers call to order, add that cost as a telemarketing charge.
  9. Gauge the costs of returned products. Some companies allow 5% of the product cost until they have their own benchmark.
  10. Determine your administrative costs as a percent of each sale. Many firms use 7% of the product cost until they determine their actual rate.
  11. Allow for any royalties, such as those offered to celebrity talent

Once a web visitor has something in their shopping cart, recommendations for related items are important to increase the average sale, without incurring a cost to acquire them. Moreover, in-bound telemarketing results show that consumers will tolerate up to five additional upsells.

Offer configuration in direct response advertising starts with a base product with a substantial perceived value. Upsells generally are priced lower to be easy decisions for buyers. Web visitors might see suggestions for items others bought in addition to the base item.

Start with the retail price you have already chosen based on current competitive, retail and wholesale environments. Results of the exercise may cause you to change your retail price in the event you allow too little for marketing and/or profit.

The first worksheet shows an example of how a company might fill out the form. The second sheet is blank for you to use.

Nonprofits should calculate the total cost to deliver services, including administrative fees. Delivery of any premium can be calculated as a product would.

Go on to Chapter 3 here.