Calculating the Marketing Allowable – Or How Much to Spend on Marketing

Before starting a direct marketing campaign, managers often wonder, “How much should I spend on the actual marketing costs?” There’s actually a way to calculate this figure. You don’t have to guess, leave it to chance, or the whims of the accounting department.

Called the marketing allowable, this figure is a form of sensitivity analysis that gives you a good guestimate of the amount left to spend on marketing after the major costs are accounted for.

In order to calculate the marketing allowable, you’ll need a few numbers handy:

  • Net sales. If you don’t have your net sales figure, take your gross sales and subtract out the returns. That’s your net sales.
  • Variable costs: To figure out your variable costs, add together the cost of good sold by percent of orders, the fulfilment cost as a percent, and the bad deby percent, then multiply it by sales. Did your eyes just glaze over? Take a deep breath. You should know your cost of goods sold. If you don’t know your fulfillment costs, use a placeholder. Twenty percent (.20) is not unrealistic.
  • Overhead costs
  • Premiums: If you give away little items with every sale, like a free exercise DVD with the purchase of a home gym system, the DVD is the premium. The cost to make each is the number you’re going to use to determine your marketing allowable.

Marketing Allowable: The Formula

The formula to calculate the marketing allowable looks like this:

Net Sales

- Variable Costs

- Overheard

- Premium

= MARKETING ALLOWABLE

What It Looks Like with Real Numbers

I’ll plug in some numbers now from a real client, who has graciously given permission for me to use their numbers as long as I don’t mention the name of the business. It’s a small, family owned e-commerce business selling gift items.

Net Sales: $48,000 (rounded out for our example)

- Variable Costs: $11,000

- Overhead: $28,000

- Premiums: $1,000

Marketing allowable: $8,000

So technically, this client is “allowed” or can spend about $8,000 on direct marketing to obtain $48,000 in net sales. Remember that I kept the numbers small and nice and round so they would be easy to follow. In truth, a company generating these revenues would need a much higher net sale figure to pay a salary – which I’d include in the overhead line as part of the operating expenses of the company.

When to Use Marketing Allowables

Calculating the marketing allowable isn’t just a subtraction and decimals example, even if you have to work some decimal magic on the variable costs line. It’s actually a useful tool for budgeting. if your company does zero-based budgeting, the kind where you have to justify your spend from the bottom up for each fiscal year, you’ll want to know your marketing allowable for the product or product category. You can easily run some figures and adjust amounts in the spreadsheet for the premiums, for example, or the overhead costs, and see how it impacts the marketing allowable.

Remember that marketing numbers are rarely fixed in stone. One of the benefits of placing these numbers into a spreadsheet and playing around with them is watching how changing one line in the formula impacts others. For example, if you can keep your overhead nice and low, look at how much is left to funnel into marketing. And if you could funnel more money into marketing, how many more potential customers can you reach? Conversely, if you up the premium amount and offer a spiffy DVD player with that DVD, you may have less for marketing, but if you test that concept and it pulls in more sales, it can be a winning combination.

Direct marketing is all about measurement. Math is the language of reality, and direct marketing, so heavily based in math, takes nebulous marketing concepts that scare CEO’s and makes them real by adding dollars, cents, and sales to the conversation.

So calculate your marketing allowable today, and play the numbers out. Maybe there’s more in your marketing budget than you thought!

Tips For a Successful Direct Mail Campaign

Direct mail has long been a lucrative marketing tool for businesses of all sizes. Whether you are a Small-to-Medium Enterprise, or Blue Chip organisation, the application of this marketing tool can really make a difference to brand awareness, customer loyalty, and lead generation.

Using DMS (Direct Mail Shots) will allow you to focus limited resources in targeted areas to increase the chance of producing results and boosting sales figures. So how can you ensure that you are running the campaign in the most positive way? Here are some top tips for making sure your campaign is profitable.

1. Plan, budget and research – sometimes, DMS can be dismissed as everyday junk mail. But if you plan your campaign properly and seek the best direct mailing services around, you have a much better chance of seeing positive results. The key things you need to think about are who you want to target, what message you endeavour to send out, when you want to do this, and what you want as a result of it.

2. Get a good quality mailing list – a high quality mailing list is absolutely essential to achieving your marketing goals. If you are using existing database information, you need to ensure that you have carried out the best database management possible. Database management can ensure that all contacts are up-to-date and all information is correct. In house lists are usually much more effective than purchased lists from external companies, so this is something to bear in mind.

3. Use incentives – you can maximise response by offering special discounts, prizes, or the enticement of a competition. Make sure that this is going to be considered in your budget and ensure you have the available resources to offer what you are proposing.

Direct-Mail Copywriting – Finding the Gold

When it comes to direct mail copywriting, finding quality marketing examples is like finding a needle inside the proverbial haystack.

Here, check this out: I’m a perpetual student. I have piles of books and papers all over the house. Courses, magazines, books, letters, and hundreds of pages of material I’ve printed from things I stumble across online.

And they’re everywhere.

Some small piles towards the back of the dinner table where no one really sits… another medium-sized stash on the chair in the dining room where no one notices too much… on top of every desk in my office… on the floor in the bathrooms next to the toilet (But not in my teenaged sons bathrooms – even I won’t venture into that place.)… and scattered around my desk on the floor in my office, I have several piles as well.

Occasionally I get through one or two of the piles, or if I take a long plane flight I’ll scoop them up and stuff ‘em in my briefcase and they’ll tend to disappear for a while, but then… within a few weeks, they magically reappear like some sort of weed in your garden you could swear you just pulled out last week, and the last week before that.

The thing is, while most of the stuff in these piles contains good information, most of the direct mail I receive, is pure crap. No matter how hard I try and find even one good idea I could use and run with, I just keep turning up empty-handed.

The other day, however, I received a very interesting piece in the mail, which I can use and actually improve on.

It was a crumpled up piece of paper, that was a cover letter to a sales piece. The letter had scrawled across it, in handwriting, something to the effect of, “I figured since you threw out the last two pieces of mail I sent you, I’d give you a head start on this one.”

This was pretty clever as a lift letter for a follow-up piece, I thought.

The copy itself wasn’t very compelling, but the concept worked. The piece was supposed to get me to stop and pay attention and I did.

Unfortunately, the actual selling piece was awful. They could have sent me the Hope Diamond as a free gift, and I still wouldn’t have been able to read through it. But the point is, at least I found an idea to run with.

The truth is, looking for exact models, in anything, is rarely productive. But searching for good ideas, finding them and then adapting them to your specific needs, is incredibly productive.

There are a few changes I would have made, to the lift note, and if you use direct mail, pay close attention to them: I would have used yellow paper, and I probably would have written the note in blue ink instead of black. I also would have included my picture on this lift note as well. Photos always get more attention and boost your response rates.

Since the transaction value was high, which means the vendor could afford to spend money to acquire customers, I also would have sent the entire thing in a garbage can mailer, instead of just crumpling the note up.

The garbage cans I’m talking about are small garbage cans you can mail out – several of my clients have used them successfully. I’m sure you’ll agree, it is virtually impossible to ignore something like this when you receive it in your mailbox.

The big problem with all this, is you typically can’t find good ideas like this in even 1 out of every 100 pieces of mail you might get. But that’s O.K., because… when it comes to direct-mail copywriting, even one good idea… is worth it’s weight… in gold.