# Posts Tagged ‘profit objective’

## How Much Can You Spend on Marketing?

*Many business owners **rely on guesswork or product enticement **to determine the amount of money to be spent on marketing to increase sales. This is a risky strategy as it doesn’t provide a hard cost calculation method. Following is a straightforward formula to help you understand where your marketing dollars are coming from.*

One way to determine how much should a company spend on marketing is to develop a “Unit Cost” model. You can apply this model formula to virtually any medium. Use the following steps to determine your allowable marketing costs.

- Start with the average value of your sale.
*To simplify, in our example your product or service sells for $1,000.* - Calculate every conceivable direct cost (fixed and variable) such as the cost of goods, fulfillment, premiums, order processing, etc. (Do not include overhead or marketing costs here.)
*Assume these costs add up to $500.* - Next, include overhead (rent, salaries, office expenses, telecommunications, etc.) as a cost.
*For our scenario let’s**assume these costs add up to $100.* - Now, establish a profit objective.
*For example, you might set your profit objective at 20% of sales minus direct costs and overhead, or $80 per order ($1,000 – $500 – $100 = $400 x 20% = $80)* - You can now calculate your allowable marketing cost by subtracting the direct costs, overhead, and profit objective, from the average sale price.
*In this example, it amounts to $320 ($1,000 – $500 – $100 – $80)* - Now you can calculate your allowable marketing expenses on a cost per thousand (CPM) basis. Use the CPM of the medium you are employing.
*Assume that you have a cost of $4,000 per thousand delivered ($4.00 each), inclusive of creative costs, printing, inserting, mailing list rental, and postage.* - Finally, calculate the response rate required to support these numbers. When you divide the marketing CPM ($4,000) by the allowable marketing cost ($320), you learn you must generate 12.5 orders per thousand — a response rate of 1.25% — to meet the profit objective of 20% (or $80 per order).

A response rate of 1.25% means everyone gets paid and your profit objective is reached.

Keep in mind that if you wanted to increase the allowable marketing cost by say 5%, the required response rate must also move up 5%, to 1.3125%. The crucial question then is: *can you increase your response rate more than enough to pay for the added cost?*