Question

Topic: Research/Metrics

Can A Marketing Budget Be Calculated Based On Lifetime Customer Value?

Posted by Anonymous on 7/7/2004 at 2:23 AM ET 50 Points
My client is a specialist musical instrument retailer. As creatives, we've developed a revised market positioning and have been asked to develop the project further. In order to achieve the goal of doubling sales revenue within 12 months, I need to recommend an advertising/marketing budget. I've heard of using Lifetime Customer Value as a basis for setting budgets, but how is it calculated?

To assist, I have access to basic sales figures and customer reports from which I should be able to estimate average figures.

Aside from plucking a figure out of the air, is there another budget-setting methodology that's easily grasped by a "peripheral" marketer like me?
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RESPONSES

  • Posted by Peter (henna gaijin) on 7/7/2004 at 3:06 AM Member
    One option may be to build up the marketing plan from scratch.

    You can talk to the sales people and get info on them on how many sales calls to new prospects it takes to make a sale. And then see if there is datas on their past marketing programs to see what it takes (how much money in ads, how many direct mail pieces, etc.) it takes to get X number of leads. With this, you could hopefully estimate how much money in marketing programs you will need to get enough leads needed to get enough final sales.
  • Posted on 7/7/2004 at 7:09 AM Member
    hi,
    You say you are starting from the need/objective of doubling sales within 12 months.

    I would break this down further by asking where are the extra sales going to come from? How much is going to come from existing customers. The customer reports and basic sales data should be useful. How much sales will you need to generate from new customers to meet your doubling of sales goal? You may need to break each of the two categories down further. The existing customers may break down into different segments e.g professional musicians. Likewise the targets for your new business may be one or more different segments.

    From once you have clear sales targets set you know that these figures are not going to be achieved by a "do nothing" strategy. So you develop your range of marketing programs to achieve each of the figures (advertising will be just one). What marketing activities you recommend will be based on what is most cost effective to achieve each of the sub targets that add up to doubling the sales within 12 months. Justification for budgets will be based on the value of customer retention/loyalty for existing customers (i.e what revenue will each customer generate over the life time). Justification for budgets for activities related to new customers will be based on the customer acquisition cost and the life time value once you have acquired them. You might find that a regular email based newsletter with special offers is a very low cost way of increasing customer loyalty and retention compared to advertising.

    Apart from specific objective driven marketing activies you may also want to allocate say 15 - 20% of the budget to non specific "background marketing" to create awareness and brand building. This would be largely things like corp. adverting and sponsorship.

    Hope this help!

    Regards

    Pat Divilly
    CEO MarketWare International
    www.marketware.biz
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