If there’s something successful about your model to regularly get clients, why would you ever want to limit your spending in marketing. Budgeting is effectively putting limits on what you are allowed to spend.
In case you are an entrepreneur and have your business, then the above argument would hold.
However when you work in a corporate setup, then every department gets allocated money because there are a lot of interdependent activities involved.
So if you work in a corporate environment or advise people in a corporate environment then below is my quick and dirty method of calculating what you may want to demand for your activities.
It starts with identifying what is the average life time value of a client for you. Do you have clients who give you recurring revenue or one time. Do you have repeat business possibilities including up-sell, maintenance charges etc. Put all of this together.
You can do this on a simple calculator and napkin.
Let’s assume you realize that your average lifetime value in revenue is $100000 over a period of 5 years and you would make gross 25% margin, then any new client has a potential to averagely give you a gross margin of $25000/- over the life of the customer or $5000 per year over 5 years.
To keep things simple I have not accounted for the referrals some of the customers may give you or additional activities during the term of the order.
So now we look at the first year – gross margin as $5000. This is the figure we will need to work on.
So suppose you were to be willing to forsake $5000/- to get a customer, you would be assured of getting a profit of $20000 over the next four years. If you have capacity then any additional business will not increase costs substantially. If you don’t have capacity then, this is not necessarily a good idea.
But for argument let’s say you have capacity, but you may still incur incidental costs of $2500. You still have $2500 you can happily spend to earn $20000 over the next 4 years.
The next item to look at is – what is the available capacity in your factory/delivery. So if your factory can deliver 10 more projects over the next 5 years, then you have to get 10 new customers for the factory.
So now you have a simple budget $2500×10 customers equals $25000/- to get an additional revenue of $1 Million (10 customers *$100000/customer)
So you need to now plan how you will spend the $25000/- such that you can ensure 10 customers come your way to your finance.
Till next time then.