In today’s lesson we are going to learn how to calculate the marketing budget for your business. We are going to answer questions such as, “how do I know how much I should spend on marketing?”, “is there a right or wrong dollar amount I should be allocating to marketing?”, “Is there an appropriate percentage of sales that I should be allocating to marketing?” and things along these lines.
In order to get started we first need to know the following formula: LADS. It is a proven formula that we have developed here at Attractional Marketing that will help you with your sales and marketing planning. Let’s look at what each one of the letters in the formula mean:
L is for Leads
This is where it all starts. In order to calculate a marketing budget, we first need to know how many leads we will need to generate for our business in order to hit the sales target that we have in mind. Leads are the very top of the sales funnel. And this takes us to the next letter in the formula:
A is for Appointments
Appointments are simply leads that have been converted into set appointments. Meaning, the lead has been qualified and has been put on the appointment schedule. As you probably already know, not all leads will become appointments. This is because as you qualify the leads, there will inevitably be some amount of drop off. But knowing the percentage of drop off is the key thing.
D is for Demos
Demos are the appointments that your company has visited with and has demonstrated your product or service to. You might have different terminology for this… maybe you call it sales demonstrations, client visits, or something different. That is fine. The point here is to know how many of those appointments turn into client visits. Not all appointments will “stick” and become demos.
S is for Sales
This is straightforward. It is simply how many of the client visits that you closed and how much revenue was generated from the sale. From this you will be able to figure out what your closing percentage is and also what your average ticket is.
How To Use This Formula
If you have historical data on these metrics that will be the easiest way to go about using the formula, since you can look back on real information that actually happened, and use it to forecast the future. If you don’t have historical information, don’t worry too much about it. You will have to use logic and reason to create an estimate which I will show you below.
Here is an Example To Show You
Let’s do this. Let’s look at an example to show you how the information works together like how we need. Imagine for a moment that “Company X” has historical data on their marketing numbers and has the following LADS information:
- 1,000 Leads
- 800 Appointments
- 600 Demos
- 200 Sales
- 2,000,000 in revenue
- $150,000 was spent on marketing
The ratios between these metrics is the real insight. Let’s take a look:
- In this example, the Lead to Appointment ratio is 80%. This means that 80% of the 1,000 leads turned into booked appointments. Conversely, it means that 20% of the leads did not. This ratio tells you how good the lead quality is. The higher the percentage, the better the lead quality.
- Next, we see that the Appointment to Demo ratio is 75%. This means that the 800 appointments turned into 600 Demos (which is 75%). This number is important because it tells you how well you are doing at confirming and qualifying appointments. A low demo percentage could indicate an appointment confirmation issue, or a lead quality issue.
- Moving on, we see that the Demo to Sale ratio is 33%. This means that the 600 demos turn into 200 sales (which is 33%). Obviously, the higher this is the better, however this percentage depends on factors like lead quality, the performance of the sales rep, product to market fit, etc. The 200 sales generated $2,000,000 in gross revenue which means we can figure out what the average ticket is. In this example, every sale that we close is worth $10,000.
- And finally, since $150,000 was spent on marketing that gives us a cost per lead of $150.
These metrics are the building blocks of what makes your marketing engine work. The ratios between and among the LADS are the “levers” you can pull in order to achieve your desired results.
A Practical Application
Let’s imagine that we want to achieve 3,000,000 in gross sales for our company, division, product line, etc. Let’s also imagine we have the following pieces of relevant information.
- Our average ticket is $15,000.
- Our closing percentage is 30%.
- We estimate our appointment to demo percentage to be 80%.
- Our lead to appointment ratio is 60%.
- Our industry cost per lead is estimated to be $150.
Based on this information, how many leads will we need in order to get there, and what will our marketing budget need to be?
To answer this, we need to work backwards, starting with our average sale:
- We know that the average ticket is $15,000, so this means that we will need 200 sales in order to hit $3,000,000 (3M/15K). So now, in order to hit 200 sales, we now need to determine how many demos that will be required:
- And since we know that our closing percentage is 30% this means that we will need 667 demos (divide 200 by .30 to get to the 667). Next, we need to determine how many appointments will be required:
- We know that our appointment to demo percentage is 80% so this means we will need 833 appointments (divide 667 by .80 to get to the 833). Lastly, we need to know how many leads we need to generate via our marketing efforts:
- We know that our Lead to Appointment ratio is 60% which means we finally have our answer: we will need to generate 1,389 leads in order to hit 3,000,000 in sales.
- We know that the cost per lead is estimated to be $150, so our marketing budget will need to be $208,333 ($150 x 1,390) or 6.94% of gross sales.
So now we have the complete picture. We know A) what our marketing budget needs to be and B) we know the percentage of sales that we should allocate for marketing expenditures.
- We need to allocate a marketing expenditure of 208,333 (which is 6.94% of gross sales) in order to generate 1,390 leads.
- This will turn into 834 appointments that will turn into 667 demo’s that will turn into 200 sales that will generate 3,000,000 in gross sales.
This is how we use the LADS Formula using Google Sheets.
- Poor lead quality on the front end makes everything else more difficult down the line.
- If you can track your numbers, then you can manage them and make improvements.
- Making many small improvements across the metrics can add up to a very large and beneficial result.
- You want high-quality lead sources that have a high lead-to-appointment ratio.
- Your people who are on the phone speaking with prospects, confirming appointments, etc. have a big, direct effect on the outcome of your company. Are they trained? Do they have a system? Do they have scripts?
- You need a CRM to manage your sales and marketing information.
If you need assistance with your marketing or would like more information, please visit our contact us page to get in touch. Attractional Marketing offers a complete line of marketing management solutions.