Answering one of the most commonly asked questions in marketing
When I was in school, I hated maths. Algebra was my worst enemy and just staying in the classroom for the two-hour lessons in high school was about as much as I could take (shout out to my tutor Jess, who saved my HSC!).
Now, a thousand years on from high school, and I can honestly say, there are few things in the world sexier than an amazing spreadsheet, with instantaneous formulas that tell me exactly what’s happening financially in my life or my business (don’t judge me!).
As a business owner and also as a fractional CMO or marketing director for various client businesses, maths is an incredibly important part of my life, and one of the most important applications of that maths, is budgeting.
I budget at home, I budget for my business, I budget for other people’s businesses.
To me, it's quite natural to work back from a set of objectives, and determine what it'll cost to achieve them and if the maths all adds up.
When working with clients, something that comes up regularly, I’d say almost 99% of the time in small and medium businesses, is confusion at setting a marketing budget.
"How much is too much? How much is too little? If I say it out loud will a consultant spend all of it, even if they don’t need it all?"
To start with, the answer to the last question really depends on your consultant. If you have a transactional relationship, chances are they live by the philosophy 'don’t leave any money on the table'.
If you have a partner (like us), the consultant will be invested in your success and there for the long-haul, so will have as little interest as you do in wasting money — it just makes our jobs harder.
The earlier questions, however, about actually setting the budget, are not as easy to answer — the confusion many of you feel is a very fair response.
So, how do you set the right marketing budget for your business?
Start by throwing out the old 10% rule... sort of...
When I was coming up through marketing, the basic rule for setting a budget, especially for B2B, was to take 10% of revenue.
In fact, as recently as the last few years, I've had conversations with CMOs who still strongly stand by this as a standard and easy recommendation.
If you do a quick search, you can find hundreds of articles that say just this, and probably a google snippet or two that suggests much the same.
The reality is, the same percentage doesn’t apply to every industry and every business, and certainly not to every lifecycle stage a business experiences.
According to Deloitte’s CMO Survey, B2B and B2C services allocate the lowest percentage of revenue to marketing, while B2C products allocate the highest (as high as 15%).
If we’re talking industry, Deloitte’s data suggests real estate and property allocate around 8% of revenue to marketing, consumer services 6%, healthcare 18%, manufacturing 13%, retail 14%, service consulting 21%, and technology 21%.
Needless-to-say, these are averages, so there are some businesses spending next to nothing, while others spend a lot more.
Businesses in a stage of their lifecycle dedicated to rapid growth will also spend a greater portion of their revenue, some reinvesting as much as 50%, while those just maintaining will spend as low as 2%.
Obviously, some business also spend nothing, but more-often-than-not, that isn’t a strategic decision as much as it’s a cost-saving tactic. The issue with that is the old adage 'you have to spend money to make it' is often true, so if they don’t market, if no one is aware of them, if no one finds their website or explores them, how do they ever kick start their growth?
Start-up businesses could also find the above quite confusing as usually revenue is very low to begin with. In this instance, we would go from revenue projections as opposed to any past performance, and adjust as needed throughout the year.
When setting your budget, taking a percentage of revenue can be the start and the end of it, but if you really want to get it right, you’ll consider your budget a living beast that will need refinement based on new information, over time.
So... you want to refine your budget?
At the end of the day, even at the beginning actually, the whole point of marketing is to enable you to achieve your business objectives. They drive absolutely everything.
So, if you don’t know what they are, how do you know how much it will cost to achieve them?
By setting business objectives, you can start a chain of steps that allows you to plan your marketing quite specifically, and budget accordingly.
Set your business objectives
Derive your marketing objectives from your business objectives
Determine which channels will best contribute to achieving each marketing objective
Work out how much those channels cost to achieve your marketing objectives
You can find a range of articles about how to set business objectives online (here’s one, and another).
Your business objectives will usually cover some financial aspects like revenue, profit, cash flow, cost management or market share; some operational things like resource acquisition and recruitment and retention; potentially some product or service development; market expansion, and maybe customer satisfaction.
Once you have them, start on step 2: deriving marketing objectives.
For example, if your business objective is to increase revenue by $300k per year; first work out how much the sales team will cover themselves (they can bring in an extra $200k), then how many more leads they need marketing to bring in for them to make that extra $100k when each sale is worth $1k. Lastly, determine at what rate they usually convert those leads (for example, 50%).
Our marketing objective then becomes: Deliver 200 Marketing Qualified Leads for sales to convert, by this date (hopefully my maths is correct there!).
Then you head onto step 3, channels.
In our example business, we'll say past results tell you Facebook is the only channel you need or will use (in the real world, you would definitely use multiple channels, but let's keep this easy!).
Using your own data from past use of that channel, or industry averages for costs and Click Through Rates from sites like Wordstream, you can work out how much Facebook ads will cost to deliver 200 leads, and start refining your budget accordingly.
By working backwards from business objectives to create marketing objectives, you can more accurately figure out how much you need to spend to get from where you are, to where you're going.
A couple of things to keep in mind
Refining budget requires consideration of many factors, here are a few:
When spending on paid digital advertising...
If you haven't done it before, it can be tempting to just pluck a figure out of the air with no research.
"Ummm, I think we can afford a hundred a month."
Do your research. Use those industry averages linked above as a starting point. That 'hundred a month' might only pay for a small handful of clicks each week, and if your landing page is converting at a low rate, and your sales team is converting at a low rate, it may just be dead money, meaning this is not your channel (or you need to up your budget).
Ads often play a big part in the awareness stage of your funnel, and we all know how a funnel works -- if not a lot goes in the top, very little will come through the bottom at any pace.
Look at the bigger picture...
It might surprise you, but it's easy to let ads (and other costs) run away from you, and you end up spending more than you make... or you spend $99 and the product only brings in $100.
Customer Acquisition Cost (CAC) is the calculation of how much it costs you to make a sale. You can find it by adding up all your sales and marketing costs in a period, for example, a month, and dividing it by how many sales you made in the same period.
Work out what CAC is reasonable for you, and let that also guide your spend. There's no hard and fast rules here and it definitely differs markedly by industry, but if you know your Customer Lifetime Value (how much each customer is worth for the period they keep purchasing from you), you know you want your CAC to be a lot less than that figure.
Marketing isn't accountable for everything...
If you are in a business with a sales person or sales team, remember they are accountable for bringing in some of the leads, not just converting the ones brought to them.
If you don't have a sales team, marketing still isn't accountable for all leads or sales, your business leaders (usually) or other members of the team are expected to hustle and bring in some business too.
Keep this in mind when setting measurable objectives, KPIs and of course, your budget.
Need some help setting your marketing budget or selecting channels? We're happy to review your thinking, or do the job for you -- just reach out!
