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3 Easy Steps to Plan Your Marketing Budget for MAXIMUM Returns Using My Secret Formula

3 Easy Steps to Plan Your Marketing Budget for MAXIMUM Returns Using My Secret Formula

October 27, 2009

See also the spreadsheet on to help calculate your MACAC at My Secret Marketing Formula

I've been holding onto this jewel. It's my secret formula I use to determine how much to spend on marketing.

Isn't that one of our biggest questions we have as leaders of our business? How much should we budget for marketing and advertising? What should we expect in response? What's a realistic return on our investment?

And don't get suckered by marketers who tell you those figures can't be determined! If you start getting that kind of feedback hang up the phone or walk away. Don't waste your time. Instead pull out my secret formula and you'll have the answers you need.

I call it the MACAC, which stands for the Maximum Allowable Customer Acquisition Cost. It's a formula that shows you the maximum amount of money you should spend on your marketing. Now most people look at ad spending the other way and ask, what's the least amount we should spend? That's called LACAC and it's completely wrong thinking.

It's better to determine the maximum you can afford to spend because here's what most people don't know: Most of your customers will stay with you for years to come. Every customer has a Life Time Value with your or an LTV.

When you know the LTV of your customers, you can afford to spend more on marketing. Most clients I work with don't think like this when we first meet. Most think only in the short-term, but the secret behind this strategy is to change your thinking so you invest in the long-term. Then, you can accurately determine how much money to spend on a promotion.

Here are 3 easy steps to determine how much you should spend

STEP 1: Determine a Life Time Value (LTV) for your customers. Here is the formula:

For example: Let's say you have a retail store and customers make 10 purchases per year on average (P = 10) and on average customers continue to shop with you for 5 years (Y = 5) making 10 purchases a year. So we know that over the course of the customer's 'life' with you, they will make 50 purchases. But we still don't know the value.

So we need to determine the average gross profit per customer. This is where most people fall apart. They say, 'Oh, I don't have an average sales price. Some things I sell are more expensive than others.' Just pick a realistic number. Let's say the average sales price is $20 and the gross profit is 60%. The average gross profit then is $12 (G = $12).

Using our formula, LTV = P x Y x G, the LTV in this examples is 10 x 5 x $12 or $600.

Imagine all your customers have $600 branded on their forehead when they walk into your store. This is where many people blow it. They think, 'It's only a $20 purchase. I can't afford to spend the time and energy if the person only makes a $20 purchase.' But I bet you would think differently about $600!

Step 2: How to determine your MACAC

We're using 2 of the same figures from our LTV formula, but we've added a new figure, the percentage of our budget we're willing to allocate towards marketing. Here comes the magic of the MACAC Formula.

What is the maximum amount of your budget you're willing to invest in marketing? I recommend that you spend at least 25% of your gross profit if you have customers who will make several purchases with you over several years.

For example, in the retail store example we just discussed, we know the average customer will stay with us for 5 years and will make another 49 purchases after the first one. So let's say we plan to spend 40% of the entire year's gross profit on marketing (M = 40%). That may sound high but let's look at the numbers.

Using our formula, MACAC = P x G x M, the MACAC in this example is 10 x $12 X 40% or $48.

In other words, $48 is the maximum amount you should spend on marketing for every new customer you acquire.

Now, let's see how to apply this and start making money. The question you want to ask is this: 'How many new customers do I want to bring in over the next year?'

Let's say as the owner of the retail store you want to bring in 200 new customers. You can therefore afford to spend $9,600. How did I get that number? I simply multiplied 200 x $48 (MACAC per customer) to determine my budget!

Step 3: Determine how many sales needed just to break even we use the following formula:

We already determined that we want to bring in 200 new customers and spend 40% of the gross profit on marketing so we know we can budget $9,600 per year for marketing. We also determined that our LTV is $600 per customer. But how many new customers do we need just to break even?

Using our formula, Break Even Point = MACAC / LTV, we get $9,600 / $600 or 16. We only need 16 new customers just to break even.

If you spent just 50 cents per piece on a mailing you could afford to send it to 19,200 people ($9,600 x 0.50). You would only need 16 people to respond! That's less than one tenth of one percent or .08333%!!

The MACAC Formula allows to spend more on acquiring customers so you're building a steady stream of business for years to come, not just for next month or for a few years to come. The secret is to think long-term about your business but at the same time you also want to be realistic about how customers are doing business with you.