“What should I budget for my marketing and advertising efforts?” I get this question a lot. Many owners & directors want to base spending on a percentage of their total tuition revenue, but there is a much more strategic way to look at how much to spend on your marketing budget. This article illustrates the way I teach my child care marketing clients to determine what they should spend… and why.
The first consideration to determine your marketing budget is: What is your Lifetime Customer Value, or LCV? For most childcare programs, the average lifetime value of a family ranges between $20-35,000. This is an extremely high LCV compared with most other service businesses, because generally families will stay with you for a long time and bring multiple siblings into your program. The LCV is much higher in childcare than in other businesses, such as restaurants or dry cleaners—even pediatricians and orthodontists. Since your business has such a high level LCV, you can afford to spend a little bit more to get a customer, and that’s a good position to be in. Let’s look at the method of determining LCV.
The steps used to calculate your center’s LCV, or average lifetime customer value, are easy to follow:
• Step One: Calculate your average annual revenue per family. For example, if your annual revenue for the past 12 months was $600,000, and you had an average of 60 families on your roster, your average ANNUAL revenue per family would be $10,000.
• Step Two: Estimate how long an average family is enrolled in your center. You can do this by looking at the historical rosters of your program. Let’s imagine your average length of enrollment is 2.5 years.
• Step Three: Multiply your annual average revenue from Step One ($10,000) times your average length of enrollment (2.5 years). In this example, your average lifetime customer value (LCV) is $25,000.
Doing some hypothetical calculations, if your LCV is $25,000, and you are running a 20% profit margin, the net LCV of that family to your business is $5,000. How much could you afford to spend on marketing to acquire the family? I think you could spend 10-20% of that net value, or $500-$1000.
The next consideration is how full you are. What is your capacity relative to your current enrolment? If you are only 50% full—or even 80% full—being aggressive to get your numbers up will make a huge impact on your business. Most of the profit in a childcare center lives between 80% and 100% of full capacity, because there are fixed costs, as you know, no matter how low enrolment may be. So, consider your capacity, how fast you want to grow and also look at your competitive environment.
Are you located in a really competitive landscape—an area where there are too many childcare centers for the number of families? If so, then you have to spend more to get each new customer. The competitive advantage boils down to this: Who will effectively market and spend enough to go get the family as a customer? The childcare center that spends enough marketing dollars to win the customer is the one that wins the game and grows the fastest.
Promotions are an important part of your marketing and advertising plan. When you make promotional offers, you can afford to give away freebies, such as: one month free, the first week free, $1000 off, three weeks free and even two months free. There are all kinds of aggressive giveaways to consider. How aggressive do you want to be, knowing that it may be well worth investing to fill your enrolment? Remember that the ‘sweet spot’ in profits is the upper 15-20% of full capacity, and 60-70% of families will stay with you even after the period of free promotions is over.
Sometimes it is worth aggressively spending on marketing to get into the range of the purely profitable ‘sweet spot’: full enrolment. Figure out how many families you need to be 95% full. Do you lack 20 families? If you are going to spend $500 per family, your marketing budget is $10,000. You could divide that budget by quarters or invest more of it during this Back-to-School season of enrolment to get really full really fast and hit your enrolment ‘sweet spot’.
This is a totally different approach than most childcare businesses—or any businesses—think about marketing. Calculating your budget with these strategic considerations in mind will be well worth it to fill your program. Take these few simple steps to heart and help your profits stay ‘sweet’!
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