So you’re on the phone with a potential marketing agency. You talked all about your company’s story, your amazing product, and how you’d like to spend on marketing to really take your company’s performance to the next level.
“Great! So what’s your budget?” they inevitably ask.
“Well, I guess it depends… We can spend as much as we want if the results are there. I mean if we’re getting results, we can spend as much as we want…”
While that may be technically true, that’s not exactly a helpful answer. And it’s essentially the same answer you’d expect from any other company who hasn’t put thought into their budget.
Why wouldn’t someone keep pouring money into marketing if you knew that for each $1 you put in you make $5 back? It’s basically a golden goose!
“Gotcha, that sounds great! But how much do you want to start with?”
“Uhh, I guess [insert # pulled out of thin air] maybe?”
“Alright got it, we can work with that!”
As long as your made up number wasn’t so low that it’s not worth their time, they’ll be happy with as much money you’ll throw at them.
The answer is never “Well that actually seems like too much, you may want to start off smaller”.
The problem is that maybe once you find your marketing golden goose you can start spending unlimited money on marketing. But if you’re not there yet, you need a real answer.
So how the hell do you actually figure out how much to spend on marketing?
How to Create a Marketing Budget
A simple rule of thumb is to spend about 5-15% of your revenues on marketing. That can obviously vary significantly based on your margins, and the growth stage your company is in, amongst other things.
But you’re probably not here for a simple rule of thumb.
If the industry you’re in is at all competitive, which it most likely is, you’ll want every edge you can get. And marketing, which can range from lighting money on fire to being your business’s main driver of growth, is an edge you want to keep very sharp.
Now if you’re an accountant trying to create a marketing budget, you’re probably thinking about your free cashflows and how small a budget you can provide thinking marketing is just an expense.
But if you’re a marketer, you’ve probably got tons of amazing ideas for which you need the biggest possible budget to achieve all those amazing results.
The problem is that too small a marketing budget is likely not going to get off the ground enough to justify spending more. And too big a marketing budget is likely going to lead to inefficient spend harming the rest of the business.
To be truly effective at developing a marketing budget, you cant think of the marketing activities in isolation. Make sure you gather information from other people on your team including operations and the accountants.
You may not be able to get into extreme depth on each of the steps I’ve outlined. But even having a general awareness of them will put you in the right mindset to think about your budget more broadly. And it’ll be even more helpful when you need to start iterating and evaluating performance.
Understand Your Business
Creating an effective marketing budget requires an understanding of many non-marketing aspects of your business.
In a sense, marketing just spins the wheels of your business faster and faster. So if you want to put your foot on the pedal, you need to know how much gas you have, what the speed limit is, and the condition of the car you’re driving.
Perhaps the most crucial thing to understand before doing any sort of marketing is knowing exactly how much money you’ll make. Not just how much the customer is paying you, but how much you have left after giving them what they purchased.
Determine Your Costs
In the marketing world, you’ll too often encounter an unusually fierce focus on a metric called ROAS – Return on Ad Spend.
The most common way to calculate ROAS is to take your revenue from an advertising activity and divide it by the cost of said activity.
So if we spent $100 on Google Ads and we generated $250 in revenue, we’d have a ROAS of 250/100 = 2.5.
Most people aren’t foolish enough to think that any ROAS over 1 is good, because everyone realizes that what you’re selling has a cost. And if that cost is too high, you can easily lose more money the more “successful” your marketing campaigns are.
To put it in the context of the above example, if it costs you $151 to provide that $250 service, you just made $99 on that sale. But it also cost you $100 to get that sale, so you’re $1 poorer.
Of course there’s plenty to be said about customer LTV, and ad optimization, but I’m trying to get a point across here.
So what should you be thinking about to avoid this problem?
Cost of goods/service
The most obvious thing is to understand the true cost of what it is you offer. Knowing the true cost is a whole topic of its own and it can get very complex. But it is something you should understand as best as you can because what you offer is the foundation of your business.
This can get even more tricky if you’re trying to figure out what the relevant cost is. Should you be looking at full cost or marginal cost?
Let’s look at a simplified example.
If I’m buying shirts from China for $10 a unit, then my true cost and my marginal cost might be the same. If you can sell it for $20, and make $10 – well then as long as you didn’t spend more than $10 getting that sale, you’ve got more cash in your pocket.
But now let’s add a little wrinkle into that.
Say if you bring a full container of shirts from China, your cost, including shipping, is $10 a unit. But if you have less than a full container, then each additional shirt doesn’t cost you $10 a unit, it only costs you the purchase price from the Chinese factory. You’ve already paid for a full shipping container, adding a few more shirts won’t increase your shipping price.
In this case you can afford a higher ad spend, because you can simply add more shirts to the already purchased container.
On the other hand, if your container is already full, then the next few shirts you order will require you to buy another whole container. At that point, you’re better off not even selling those shirts.
Of course the above analysis, only gets you the cost of your product.
There can be many other costs associated with the increase in sales such as account managers having to spend time managing the client, warranties, and customer service costs.
All in all, it can be a lot of work to know the true value of each incremental sale. But thinking about these things will already put you much further ahead than those who think the only numbers to consider are Sales and Ad Spend.
Full Cost of Marketing Activities
Your cost of marketing should be considered with a lot more sophistication than just asking how much you’re spending on ads.
While there are plenty of free tools out there, you’ll often need to spend money on paid tools to be able to carry out your campaigns effectively, and to track results well.
And obviously you need people to spend their time executing on marketing tasks. If you hired a few staff that you add to your team, you have to consider the full cost of having those employees – salaries, benefits, management attention.
Spending on marketing isn’t just a concern of the cash it takes to do marketing. There’s also the incredibly important resource of your administrative time that goes into monitoring the messaging, authorizing campaigns, and reviewing the results.
Marketing is generally not a set it and forget it type of deal. It’s very easy for it to become a black hole of spending where you keep sinking money chasing metrics that aren’t driving value.
Minimum Cost of Marketing Activities
Most channels have a sort of minimum commitment you have to make to be able to get an accurate sense of its performance.
If you want to try Facebook ads, you need to at least invest in photography or video content. You could use some of the stock imagery available in Facebook, but it’s not always going to yield great results.
Influencer marketing can require a fair bit of an upfront time investment. You’ll have to research a list of potential influencers, get in contact with them, negotiate a deal, and send samples of your product. And once they’re on board, you’ll have to either pay them or set up some sort of commission tracking software.
Google Ads can actually have a fairly low barrier to entry. All it requires is a small budget and you can start bidding on certain keywords. Naturally, larger budgets will help optimize over time better. But you don’t necessarily need tons of content or fancy landing pages just to get started.
Understand Your Cash Flow
While it may be true that as long as you’re getting a good ROI on your marketing efforts, you’re willing to keep spending more. That truth is always going to be limited by cashflow.
The relevance of your cashflow can be as simple as looking at how much cash you actually have available to risk on your marketing efforts. If you’re just getting started, you have to keep in mind that there’s a chance that you won’t generate any results. So make sure you’re spending an amount that you can tolerate losing. And which won’t make things too tight for you cash-wise elsewhere in the business.
The other part of the cashflow consideration is that in certain businesses it takes a long time to recover your investment – even if it’s successful. If you’re selling an item online, you may recover your marketing spend in a few days the moment the payment is processed.
If you’re a SAAS business, you may be banking on an average LTV. Meaning you expect to recover the acquisition cost once a customer has been with you for 24 months on average, for example.
And if you’re a business that relies on leads, then you have to consider the sales cycle. You may spend a certain amount to get a lead. But then that lead has to be nurtured for a while. And eventually some portion of your leads will close into actual sales. And that’s when you recover your marketing spend.
Taking into consideration how comfortable your cash position is, and how quickly you’ll recover your investment, is very important in determining an appropriate marketing budget.
Plan your testing
Once you have a good sense of the details of your business and the constraints from an operational perspective, you’ll be able to better understand how your marketing efforts will affect the rest of the business.
The next step then is to plan exactly how you want to deploy your marketing budget.
If you don’t have much history to work off of, you’re going to start off by doing a lot of testing. That doesn’t mean you won’t get results, but they most likely won’t be optimal off the bat.
Break Down Your Sales Funnel
Start by gathering whatever data you can around your sales funnel.
You’ll want to be able to determine how many people you need to reach at the top of your funnel to make them aware of your brand/service.
That will depend on knowing how many of those people who know about you engage with you and move further into the funnel.
And then you have to know how many of those people you actually close into paying customers.
If you can gather this data, you can determine what you need to spend to get some amount of people making it all the way through the funnel.
If you have a marketing budget smaller than what would be necessary for people to make it to the final stage, then it might not be worth the effort yet.
On the other hand, if you don’t have much data about the funnel because up until this point all your customer acquisition was through cold calling and word of mouth referrals, you may need to be willing to spend more on testing.
Think about the familiarity your target demographic has with your brand and with the service you’re offering. Are you a new brand offering a service that people already know about but you do it better than the competition? Are you offering a service that solves a problem that people didn’t know there was a solution for?
It may be that your target demographic is familiar with what you offer, but doesn’t know about your brand or your unique selling proposition. That might mean you simply have to get in front of the customers that are already out there, and show them what you’ve got.
But if you’re targeting a new demographic that isn’t aware of what you offer or why they should care, you may need to spend time convincing them that it’s something they should value. And that may require a bigger investment in the higher portion of the funnel.
Investigate Your Competition
Consider whether your product is one that can focus more on push vs pull marketing.
For some offerings demand is “pulled” by customers, meaning people go out and look for the solution when they need it. That means something like Google Ads can be very effective where you can be the result that pops up when they search for it.
In those cases, you can often get a good sense of how much you need to spend to be in front of people. You can look at how much your competition is spending by analyzing Google Ads data around keyword bids.
Knowing how much you’ll pay per click, combined with an understanding of your funnel, should help you determine a minimum amount of spend for this channel.
But what if you’re selling the “push” marketing kind of product? The kind where you need to be in people’s faces to make them want to buy what you’re selling. As is often the case with something like fashion. Then you may need to spend on platforms like Facebook. Where people aren’t necessarily looking to buy anything, but you’re trying to create a desire for your product.
In those cases it can be harder to know how much you’ll need to spend, since you won’t have quite the same data as Google Ads has. But you can get a sense of effectiveness by looking at if your competitors are spending on ads. You can also combine that with industry data around cost per click and conversion rates.
For example WordStream has a beautiful graphic giving an idea of the average conversion rate by industry. You can use that data, add a conservative buffer, and that can help you determine how much you’d need to spend to start getting the conversions you want. Combine that with what you know about margins and cashflow, and your marketing budget should start to look a lot more fleshed out.
Measurability of ROI
When deploying your marketing dollars, you should be very aware of how much you’re willing to risk. Because there will always be uncertainty around how much value you’re actually generating.
Most marketing efforts will fall on a spectrum somewhere between directly attributable to frustratingly nebulous. That means you might know exactly how much of a return you’re getting for each dollar you spend, or it might be a total mystery.
If you’re a new brand, something like Google Ads can represent a channel with great attribution. You’ll pay a certain amount to have people click your ad bidding on a specific keyword. Those people likely do not know your business from elsewhere. Especially if you may not rank very highly in organic search results yet.
So if a certain number of them convert, you can know with high confidence the exact ROI on the money you put into that channel.
On the other hand you may decide to buy the advertising space on the side of a city bus, run radio ads, and buy billboards, all at the same time. Then it’s hard to know just how much value a given billboard, for example, is providing. Since thousands of people drive by it every day, while also seeing you on buses and hearing you on the radio.
Knowing where your chosen marketing channel falls on that spectrum, will inform how confidently you can calculate your ROI.
You’ll usually want to focus on channels with better attribution. That means you can spend less to get some solid testing and results. And it means you can be more confident in your budgeted returns.
Consider Your Goals
The goals that you have laid out for the future of your business will determine your marketing strategy. Which will naturally further inform your budget.
If you’re the new kid on the block, you may have to be a lot more aggressive about how much you spend and how many risks you take to be able to break into a crowded space. If you’re an established player, then maybe you just need to maintain a steady pace of growth and avoid losing too many customers to your competitors.
Slow and Steady
If you’re like most small companies that aren’t flush with cash, you may be inclined to take the slow and steady approach. Especially if you’re already operating at a healthy pace with a full client list.
You’ll want to allocate as much money as is necessary to test out the various channels to determine what’s working and what’s not. That way you can deploy your funds to always prioritize the highest possible return.
Certain businesses can’t grow slowly though. If, for example, you’re in the type of business that benefits substantially from a networking effect, where the more users you have, the better the experience, you can’t take it easy.
If you grow slowly, you’ll quickly lose disinterested customers. But the more users you can add, the easier it’ll be to retain those users.
In this case you may need to lean more towards a heavily loaded marketing arsenal.
That doesn’t mean you shouldn’t be testing though. You may need to simply front load your budget to do as much testing as quickly as possible. So you can hone in on the approaches that are effective, and reallocate and double down on what’s working.
You may be able to tune down the spend once you build momentum, but expect to spend heavily at the outset.
Opportunity Cost of Inaction
Even if you don’t feel compelled to try and grow your business, there’s still likely a minimum amount that needs to be done to stay where you’re at.
Let’s say you released an amazing new product that got a ton of press and there was a huge influx of customers. You’re thrilled, had a rough time keeping up with all the demand, but now you’re firing on all cylinders. So you aren’t looking to keep adding more customers just yet.
Thing is that people don’t generally use a product or a service forever, and you’re going to experience churn.
If you’re so focused on taking care of the business you already have, you may not be doing enough to ensure you lose customers as slowly as possible, or that you’re replacing them with new customers.
Ignoring this can lead to a slow decline. Which can mean less and less free cash available. Which in turn means you have even less to spend on reversing the process.
Be aware of the danger of inaction, as there’s always someone on your heels, and no company lasts forever.
Marketing Feedback Cycle
Above I had mentioned how you need to take into consideration the time it takes for certain marketing spend to actually yield it’s return. Similarly certain marketing activities take a certain time to show whether they’re effective or not.
For example, SEO is a channel that can typically be pretty slow to generate results. For most searches, the top results on Google are held by pages that have been around for a long time and have demonstrated their “right” to be there.
If you generate some fantastic content that should outrank what’s already at the top, it’ll usually take quite some time before Google has enough data to know that your content is in fact better than that of the others.
How long it takes will vary with several factors like your domain’s relevance for the topic, the competition for the search term, how many backlinks you have, etc. But all in all, it’ll often take at least a few weeks.
On the other hand, a channel like Google Ads can show you a return right away. Especially if you target high commercial intent keywords.
Say you bid on a keyword like “buy women’s shoes online”. There’s a good chance that whoever is searching that is looking to buy right away.
That means that you can go from setting up your campaign to figuring out it’s effectiveness within hours.
Steady-State and Iterate
By now you’ve planned your testing strategy and estimated how much time and money you’ll need to gather data. You’ve also decided whether you’ll be using a more front-loaded budget or not. Next, you’ll have to plan for the “steady-state” portion of your budget.
How much you spend compared to the testing phase will depend on your results. But you can assume that it won’t be a huge difference, unless the results are really bad, or incredibly good.
That being said, the days of having an inflexible budget that’s planned 12 months in advance with no room to budge are mostly behind us. Most business environments are a lot more dynamic, and there’s a lot more data constantly informing our decisions. So be open to flexing this portion of your budget based on the results of your testing phase.
The key is again to remember your cashflows and try to plan ahead for this phase assuming conservatively good results.
There’s a good chance that after your first pass at the various marketing channels, you won’t have achieved optimal results. And even if you miraculously did, you can’t really know that unless you keep on testing.
So even after the initial testing phase is done, there should always be a portion of your budget allocated to testing and gathering further data. So that you can continuously optimize your spend.
What that portion is will depend on how profitable your campaigns currently are. As well as what reasonable expectations you have about how much more efficient you can make your spend with future optimizations.
That could look something like keeping 90% of your budget spending on campaigns using tried and true approaches. While 10% is testing new ideas, and applying the winning tests to update the 90% spend.
Ultimately, as with any budget, you’ll have to perform consistent reviews to ensure that you’re performing to expectations, so that you can iterate month after month.
Whether that takes the form of changing the overall budget, or reallocating spend to different channels. Budgeting your marketing spend is something you’ll always have to do, but that you’ll become more of an expert at over time.
And if at this point you’re still completely lost. Then, hell, just start with 5% of revenue and learn as you go!