WHAT IS MARKETING COST?
Marketing expenses are the expenses necessary to carry out the marketing activities of a consulting business. General marketing expenses include advertising expenses, sales promotion expenses, sales personnel expenses, and sales and administrative expenses.
HOW TO DETERMINE THE RIGHT LEVEL OF MARKETING INVESTMENT?
There are several patterns in how to determine the marketing costs of consulting business. In this article, I will introduce three patterns, so I hope you can use them as hints when creating a marketing budget for your consulting firm.
How to decide ①: Decide based on the previous year’s marketing expenses
The first method is based on the previous year’s marketing expenses. I think a lot of consulting companies use this method. The good points of this method are that it is easy to create a budget when continuing marketing activities from the previous year, it is easy to allocate the budget, it is easy to pass the approval process, and it is easy to estimate the cost-effectiveness based on empirical rules.
However, since the budget is determined based on the previous year’s marketing expenses, there is a high possibility that the marketing activities will be the same as the previous year. Unless you can achieve your goals even if you start and end with the same marketing activities as the previous year, it may be difficult to achieve your goals unless you review the marketing activities themselves, so be careful.
In addition, it cannot be used in cases where the marketing expenses for the previous year cannot be calculated in the first place, such as a startup that has just been founded or a new consulting business that has just been launched.
How to decide ②: Decide the ratio of expenses to the gross profit of the previous year
The second method is to determine the ratio of expenses to the gross profit of the previous year. Gross profit is the total amount of sales minus the cost of sales. By setting a percentage (upper limit) to be allocated to marketing expenses against gross profit, you can prevent marketing expenses from being wasted like water.
The good thing about this method is that it prevents the marketing budget from being wasted, and it forces marketers to focus on profits. If you want to increase your marketing spending over the previous year, you have no choice but to increase the total gross profit you earn. If the attitude to secure profits works well, it will lead to investment in more cost-effective marketing activities, withdrawal from less cost-effective marketing activities, prevention of easy price reductions, and strengthening of cooperation with sales departments.
However, since the ratio of expenses to the gross profit of the previous year is determined, it cannot be used for newly founded startups or new consulting businesses just launched, as in method (1). Also, if the previous year’s performance is poor, the total marketing expenses will be less, which may lead to a reduction in marketing activities in that business.
Therefore, the method of determining the ratio of expenses to the gross profit of the previous year can be said to be a method that functions effectively after continuous business growth (increase in sales and gross profit) can be expected.
How to decide ③: Decide marketing expenses by calculating backward from the achievement of the goal
The third method is to decide the marketing cost by calculating backward from the achievement of the goal. This method is a very standard method of determining marketing expenses by identifying the marketing activities necessary to achieve the purpose and calculating the necessary expenses.
The good thing about this method is that you’re more likely to hit your goals because you’re basing your marketing efforts and costs on those goals.
Although it is a standard method, it can be said that it is a method that requires a lot of marketing knowledge and practical experience. For example, it is necessary to have the ability to work backward from the achievement of goals and work out strategies and tactics and apply them to marketing measures, as well as the ability to estimate in advance the cost-effectiveness of the investment.
A poor outlook on cost-effectiveness may result in an inadequate return on investment. Also, if you don’t set a marketing spending limit up front, you’re more likely to spend a lot of money on unprofitable marketing efforts. This can be fatal for small and medium-sized consulting enterprises with limited management resources (especially startups that have just been founded or new businesses that have just been launched), so caution is required.
Therefore, when adopting this method, it is difficult to set up marketing expenses without marketing knowledge and know-how. If you do not have the marketing knowledge or know-how in-house, it is also important to seek advice from experts with marketing knowledge.
How to check marketing cost-effectiveness?
Next, I will explain how to check the cost-effectiveness of marketing. To answer the question, “Why did you choose that policy over other policies?”, it is necessary to be able to explain the effectiveness of the chosen policy, that is, its cost-effectiveness. So, what are some ways to check the cost-effectiveness of marketing? There are several ways to calculate the cost-effectiveness of marketing.
Confirmation method ①: ROI (Return on Investment)
The first is ROI (Return on Investment). ROI is an index that shows how much return (profit) there was for investment (cost invested). ROI is generally calculated by the following formula.
“Profit ÷ investment amount x 100 = profit recovery rate (%)”
ROI expresses the return on investment as a percentage (%). Deriving ROI is very important. It makes it easier to make investment decisions because you know how much profit you will get back for your investment. In addition, limited management resources can be invested in measures with higher ROI, making it easier to increase the success rate of the business.
Confirmation method ②: ROAS (Return on Advertising Spend)
The second is ROAS (Return on Advertising Spend). ROAS is an index that shows how much return (sales) was made through advertising for advertising costs. It is a method used to express the cost-effectiveness of advertising, and it is an indicator that is often heard in the field of marketing. ROAS is calculated by the following formula.
“Sales ÷ advertising expenses x 100 = sales recovery rate (%)”
The sales recovery rate indicates how much sales are generated for every $1 spent on advertising. When advertising using multiple media, it is used to compare the effect of each media.
Confirmation method ③: CPA (Cost Per Acquisition)
The third is CPA (Cost Per Acquisition). CPA is a value that indicates how much advertising costs are spent for one conversion (CV). This metric is also known as the cost per customer acquisition. CPA is calculated by the following formula.
“Advertising cost ÷ Number of conversions (CV) = Customer acquisition cost (¥)”
CPA, like ROAS, is a method used to express the cost-effectiveness of advertising and is an indicator that is often heard in the marketing field. A lower CPA (lower cost per customer acquisition) means that you can generate more conversions (CV) with less advertising spending.