overhead

Using a unit-cost strategy can help you get a handle on your marketing budget

As mentioned in my last blog, it’s critical that companies decide upfront how much to spend on marketing in a given year. That’s tough for start-ups to do. But it’s a bit easier for established companies that use a unit-cost model.

First, take a standard profit-and-loss statement and break it down into values per unit. Each transaction equates to one unit. Then project the number of units you will sell in the coming year. In this example, let’s call that number 100.

Next, determine the transaction value. That’s the unit selling price. For this example, let’s say it is $1,000, and those 100 units multiplied by $1,000 is $100,000. At this point, we’ve established the two most critical considerations: the number of transactions you are likely to have, and their unit selling price.

Now, let’s turn to the calculation of unit costs. The first thing we will examine is the direct costs associated with those sales. That is the cost of goods sold, the cost of the order process and fulfillment. This cost will include everything but overhead and marketing.

When you add up those costs, applying them to the units that will be sold, you have unit costs for the direct costs associated with the sale. Let’s call this $500.

Next, let’s examine overhead-per-unit costs, including rent, electricity, other utilities, office expenses, telecommunications and salaries. Let’s call this $100.

Adding direct per-unit costs and overhead per-unit costs, we will add $500 and $100, for a total of $600. What’s left to us is $400 per unit.

Now, we want to set a profit objective. Let’s say that’s going to be a combination of 20 percent of sales, less direct costs, less overhead. Taking a 20 percent slice of that $400 above, we come out with a profit of $80 per unit.

Now we’re ready to calculate the allowable marketing costs. We’re going to subtract direct cost, overhead cost and profit per unit, which comes out to $680 per unit ($500 + $100 + $80) from average selling price, leaving $320 per unit.

Based on the projected unit sales of 100, times the $320 per unit marketing costs, leaves us an allowable marketing spend of $32,000. That’s how much you can spend on marketing in the coming year.

In this simple exercise, we’ve established how many units you’re going to sell, what the selling price will be, and what the costs of making that sale will be, and your profit objective, leaving the remainder available to spend on marketing.

Knowing your allowable marketing spend answers a very critical question. Many people struggle with how much money they should spend on marketing. But you don‘t ‘t have to face a similar struggle. The key is to establish how much profit you want, before you start spending your marketing money wildly.

If you need insight on your marketing spend, please contact me. I offer a 100 percent guarantee on my work. I take on only clients I can help. Call me for a free consultation and let’s talk about your business.

My phone number is 630-269-7646.