What's a good ratio of advertising to revenue for a target business?

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April 23, 2020

by a searcher from Carleton College in Leesburg, VA, USA

What's a good ratio of advertising spending to gross revenue for a target business?

I am looking at a specialty manufacturing business that is a near-monopoly in its narrow but widening niche. It spends little on advertising, but still generates most of its revenue from a steady stream of new customers -- not from returning clients. There is nonetheless a sizable backlog of orders.

I am trying to quantify whether the circumstances warrant overlooking the lack of recurring customers. If you think there is another metric that would better round out the picture, I'd be pleased to learn about that as well.

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Reply by a searcher
from The University of Chicago in Dallas, TX, USA
Not every business has recurring customers - how many pool tables do you buy in a lifetime? caskets? paintings of your cat? That metric might be misleading or might be a sign of a fad product that is an impulse buy but with no staying power - only you can answer that.

I think a better way to look at things is what is the margin on each new sale? Does that margin leave reasonable room for marketing spend? or do you require a lifetime value approach to justify marketing?

A bigger concern for me would be your statement about "backlog of orders" - that sounds like demand is exceeding supply. The answer to that problem is rarely "more marketing". Is supply in some way limited? Do you have the skills and knowledge to ramp up demand to meet supply?
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Reply by a searcher
from Georgia State University in Austin, TX, USA
I agree with the themes Bob and Brandon highlighted. I would want to know where the new customers are coming from (word of mouth/referral, web, trades, etc). With that info and data from the seller I would estimate a customer acquisition cost, sales/funnel lead time, and then start down the path of understanding customer LTV (and to Brandon's point determine what the margins will allow re: marketing). Re: your specific question on ad spend/revenue, I don't know the manuf. space but there may be trade associations that have marketing/ad spend data (it's likely generic but may be somewhat useful).

Good luck,
Chip
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