Deciding how much money to spend on marketing can be daunting. It’s impossible to guess how much budget you will need and be right.
Typically, budgets run for 12 months – this is usually tied to sales/revenue forecasts. You need enough to support revenue targets, but not too large of a budget that you can’t deliver a return on investment (ROI).
So, where do you start?
Luckily, there are a few strategies that can help you set, plan, and allocate your marketing budget.
Strategy #1: The arbitrary amount
While not advised, a common approach is to set an arbitrary monthly/annual budget based on what the company can afford. While this makes overspending near-impossible (a good thing) it’s not goal-focused and relies too heavily on guesswork for our liking. As a result, it’s very probable that the amount chosen will be either too low or too high to hit your growth objectives.
The only situation where this approach might be advised is during the early stages of a company where there is very little data on how much a customer/sale is worth and objectives might be more intangible (e.g. validate the business).
Strategy #2: The arbitrary percentage
An ever-so-slightly-better approach is to use a typical average figure for marketing budget, based on a percentage of revenue (e.g. 11% of revenue). Again, this is fine for those starting from scratch but not ideal for more mature marketing teams. As time goes on and you understand your marketing needs, you can adjust this budget based on which channels your target market most commonly interacts with – and what works best at driving sales.
Top tip: This is a great starter model but from here, each month you need to test, measure, learn and then tweak your marketing activity to deliver to sales objectives and gain your ROI.
Strategy #3: The industry benchmark
Some companies tailor this blanket approach and select the average for their industry. For example, According to Deloitte’s CMO Survey, consumer packaged goods use 24% of revenue, whereas transportation uses 8% of revenue.
While this theoretically ensures you allocate enough budget to be competitive, it’s based on two wobbly assumptions; First that your competitors know what they’re doing, and secondly that you’re content with matching your competitors rather than outpacing them.
This approach is useful when used as a guideline, but the best way to connect your budget-setting to the business’ objectives is using this next approach.
Strategy #4: The goal-focused approach
The best way to set your marketing budget is to work backwards from your goal.
1. Build a model that is outcomes focused
Outcome-based budgeting changes the internal conversation. Rather than talking about tactics with your leadership team you are now engaged in strategic discussion.
This approach results in marketing being accountable for the impact on sales revenue – which is great for getting internal buy-in and additional future budget.
With this approach, you determine the business outcomes that marketing is expected to impact. This builds trust.
For instance, if you know your average sale = $1,000 then you can run the math backwards on your funnel to determine a rough number you should be willing to pay for sales qualified, marketing qualified and marketing accepted traffic.
This can be measured and optimised to deliver sales revenue. You can create a marketing plan tied to these business outcomes. Along with Key Performance Metrics that you can work to to measure the impact, effectiveness and value of your marketing.
And from this, you’ll know which tools and systems you will need to execute the plan, manage and measure performance.
2. Determine overall marketing budget
Once you have the model you should be able to determine your overall marketing budget.
For example, if the average transaction = $1,000 and you want $100,000 in revenue then you need 100 customers.
If your conversation rate is 10% then you need 1,000 qualified prospects, etc. From a revenue only point of view your breakeven marketing budget is $100k.
You can also run a model that factors in gross margins if you prefer (I generally recommend modeling on lifetime value rather than single transaction value for marketing purposes).
3. Optimise your channel marketing strategy
Once you have your marketing budget, take 80% and apply it to channels you have experience with or expect to perform well.
For this, you should dig a little deeper to analyse the way your customers engage with you. Is this through a mobile-ready website, app, social media, or mobile advertising etc? This helps decide where to continue or increase the budget.
While this part tends to be more art / experience than science, overtime, you can identify which marketing channels add most value (increase engagements and sales conversions). Then you can dedicate more of your marketing budget towards those that work the best for your business.
4. Test, measure, learn, apply
The final step is to constantly monitor how your customers engage with you through analytics dashboards – whether that’s through LinkedIn, Google Analytics or marketing management platforms.
Look for weaknesses and remedy them.
This could be by dedicating extra funding to optimising these channels to make sure they perform – just because a channel isn’t fruitful, it doesn’t mean the channel is at fault – it may need optimising.
If you spot any dips in engagement and poor performing channels, you should limit your everyday marketing activities until you have identified the issues and optimised the channels – otherwise you won’t deliver ROI.
The remaining of your marketing budget (20%) should be allocated to rapid experimentation.
Experiments should have clear success conditions. Anything that succeeds scale. Anything that fails, move on from fast.
Important side note: Never let yourself become complacent. Things change all the time in marketing – consumer behaviour, channel algorithms, the latest technology. Be prepared to consistently test, measure, learn and then apply your findings to optimise your results. By doing this you can keep your marketing budget under control and create a better ROI for your spending.
How much should you spend?
When marketing is highly effective, the return on investment is proven. As long as you get your marketing budget and plan right, the resulting sales from new customers will be higher than what you spent. This is why marketing usually forms a key aspect of a business plan: it’s essential for business growth.
In very basic terms, a business can evaluate the effectiveness of their marketing based on a simple calculation, to work out how much sales revenue has been generated as a percentage of what was spent on marketing. As long as the new revenue is higher than the spend, you could say that the marketing was effective. But there are levels of success, as it’s usually possible to improve marketing ROI by refining the strategy and execution.
You can achieve this by:
- Creating a projection to work out how much your growth is worth and use that to set your budget.
- Reviewing/monitoring marketing budgets, key milestones, and projections at least monthly.
- Consider changes based on real data roughly once per quarterly (could be faster or slower based on your market conditions.
Ultimately, to make good budget decisions, it’s key to centralise your marketing in one place so you know what to start, stop, and accelerate.