How to Set a Marketing Budget Around Customer Value
Most budgets start with a round number. A better budget starts with how much a new customer is worth and how many of your leads become customers. From there you can work out what you can afford to pay for a lead.
The Worksheet
Fill in your own numbers. The example column uses made-up numbers to show the math.
| Step | How to work it out | Example | Your number |
|---|---|---|---|
| 1. Average sale | Total revenue divided by number of sales | $1,200 | |
| 2. Gross margin | What you keep after the direct cost of the job or product | 40% | |
| 3. Purchases per customer | How many times a typical customer buys from you | 2 | |
| 4. Customer value | Step 1 x Step 2 x Step 3 | $960 | |
| 5. Share you will spend to win a customer | The part of customer value you are willing to put toward getting them | 30% | |
| 6. Affordable cost per customer | Step 4 x Step 5 | $288 | |
| 7. Close rate | Customers divided by qualified leads | 25% | |
| 8. Affordable cost per lead | Step 6 x Step 7 | $72 | |
| 9. New customers you want each month | Your goal | 10 | |
| 10. Monthly budget | Step 6 x Step 9, including ad spend and management | $2,880 |
How to Use the Result
Step 8 is the number to watch in your reports. If your cost per qualified lead is below it, there is room to spend more. If it is above, fix the campaign or the follow-up before adding budget.
Step 10 covers everything you spend to win customers: ad spend paid to the platforms plus the cost of managing the work. Keep both in the calculation so you are comparing the full cost against what a customer brings in.
Common Mistakes
- Using revenue instead of margin, which makes every channel look more profitable than it is
- Ignoring repeat purchases, which undervalues customers who come back
- Counting every lead instead of qualified leads when working out close rate
- Judging a channel after a few weeks, before it has enough data
- Leaving out the time your team spends following up
Where to Go From Here
For paid search specifically, read how much to spend on Google Ads. To see how our plans line up with your budget, try the plan questionnaire on our packages and pricing page, and see how to get more from your marketing dollars.
