Marketing budgets are a tricky topic for every business and there’s no single formula that calculates the perfect budget for any given strategy. The ideal figure depends on the nature of your business, how it’s structured, what your objectives are, how your sales funnel is constructed and a whole bunch of other factors.
Set your budget too low and you’re never going to get the results you need from your marketing strategies, meaning your entire investment is compromised. Spend too much or allocate your budget in the wrong places and you risk running out of funds before making a return on your investment.
Setting the right budget and using it effectively is the biggest challenge marketers face. So how do you pinpoint the ideal figure, allocate it for maximum impact and optimise your spending to squeeze out every last drop of ROI?
The marketing budget conundrum
The marketing budget is a complex being and it often leaves marketing teams at odds with executives. Like all things in business, you have to spend money to make money but marketing can be expensive and it’s not always obvious where marketing actions justify the spend.
As we’ve discussed before, it can be difficult to prove the ROI of individual email campaigns or ad clicks, especially when they don’t lead directly to sales. Unless you can prove the value of these marketing actions, your marketing spend looks inefficient, even if you’re spending money wisely.
This is compounded by the fact that so much of modern marketing revolves around testing, experimentation and learning from both successes and failures. It’s easy to bask in the glory when things go right but it’s equally difficult to show that failures are also part of the journey towards success.
To ensure that you get the budget you need for all those blog posts, email campaigns, experiments and software tools that capture leads and turn them into paying customers, it’s crucial that you have the right analytics and attribution system in place to prove their worth.
Only by showing investors and executives the financial benefits of every marketing action can you guarantee you’re going to keep getting the funds to make things happen.
Perhaps, more importantly, this data will help you allocate your marketing budget to the most effective channels and campaigns. You’ll waste less budget on ineffective marketing actions, redistribute spend to where it has the strongest positive impact and identify opportunities for improvement – all of which leads to a greater return on your investment.
How to set a marketing budget
Marcus recently published his ultimate marketing plan on the Venture Harbour blog, where he runs through each stage of the creative planning process. On the subject of marketing budgets, he explains that there are generally two ways businesses determine how much to spend:
- Benchmark budgets: Where businesses set aside a fixed percentage of revenue (e.g.: 7-15%) as their marketing budget.
- Goal-based budgets: Where your marketing goals, devise a workable strategy for achieving them and assign the necessary budget to make it happen.
As Marcus explains in his guide, the second of these approaches is by far the most effective method of setting budgets and getting the best results. To illustrate why this is the case, let’s take a closer look at these two approaches to setting budgets.
Method #1: Using benchmarks to set your marketing budget
Read any generic advice on setting budgets and you’ll often hear arbitrary figures for how much you should dedicate to marketing activities. Generally, these figures will be anywhere between 12-20% of total revenue for newer companies that want to grow and somewhere in the 5-15% for more established organisations looking to maintain growth.
According to The CMO Survey: Fall 2018 report, the average marketing spend is 7.3% of company revenue, which gives us a rough idea of pre-Covid budgets.
However, the previous year’s report showed how much this average figure varies across different industries, even when the average across all industries was a similar 7.5%.
All you have to do is look at industry variance to see how arbitrary averages can lead you astray.
Going back to Marcus’ ultimate marketing plan, he explains that while this benchmarked approach is simple and easy to control, it can leave you in a vulnerable position.
“The problem is that it’s not based on achieving an objective. Spending 12% of revenue on marketing every month may seem reasonable, but it may only be enough to keep up with your competitors if they’re also doing the same. It may even lead to losing market share, especially if your competitors are using the following approach.”Marcus Taylor, Venture Harbour CEO
While it’s important that you don’t spend beyond your means, it’s equally as important that you don’t underspend on marketing and miss out on opportunities to drive growth that could secure your position in the industry for years to come.
Also, if you’re not budgeting based on marketing objectives to begin with, it’s unlikely that you’ll be assigning funds to channels, campaigns and actions based on objectives either, meaning you’ll never get the most out of your marketing spend.
You’re simply putting in average investments and getting average results in return.
Method #2: Setting budgets based on your marketing goals
Instead of setting arbitrary marketing budgets and simply keeping your business alive, it makes more sense to define specific growth targets and set your budgets based on achieving them.
Here’s the example Marcus provides in his marketing plan guide:
Let’s say the business wants to grow by $500,000 revenue in 12 months.
If each customer brings in $2,000, then you need 250 new customers. This means, your breakeven marketing budget would be $500k (acquire 250 customers @ $2k each).
If you aim for a gross profit target of 50%, then your marketing budget is $250k and you have a target acquisition cost of $1,000. From here you can work out how many leads, demos, or clicks you’ll need to acquire one customer giving you a target cost per lead, cost per click etc.
With a budget of $250k and a target acquisition cost of $1,000, you can start putting strategies together that will achieve your growth target within those means. Your next step is to calculate the expenses of each marketing action within your strategies – every blog post, ad campaign, follow-up email, etc. – to make sure that your goals are achievable within the set budget.
To calculate the acquisition cost (CPA) of marketing actions, you can use this simple formula:
CPA = Total cost of action / total conversions
Let’s say you want to calculate the CPA of leads from a paid advertising campaign to make sure the numbers add up. You have to make sure you consider all of the costs that go into running that campaign to get an accurate picture of the true expense – for example:
- $100 per month on a Google Ads campaign
- $100 per month of a Facebook Advertising campaign
- 6 hours of writing ad copy at $80 per hour
- 6 hours designing a landing page at $60 per hour
- 2 hours designing ad visuals at $30 per hour
- 1 hour promoting content on social at $30 per hour
- 1 hour creating an automated email campaign to follow up leads at $30 per hour
Of course, these are all for the sake of example but the point is that you have to get an accurate figure of your marketing expenses to set and allocate your budget effectively.
In our example, the cost of this campaign for the first month is $1,013, including the monthly ad spend and the one-off expenses for creating the campaign. So even capturing just one lead in the first month would put us in line with our target $1,000 CPA before our monthly spend drops to $200, at which point we need to start factoring for optimisation expenses.
We can then use CPAs and total as KPIs for this campaign to ensure that performance is on track. If we’re capturing leads for less than our target CPA, we can increase bids to capitalise on the success of this campaign. If we’re overspending, we pause our spend and use it for marketing actions that are achieving better results.
How to allocate a marketing budget
With your marketing budget set, you now have to allocate it across each channel with the aim of maximising the performance of your overall marketing strategy.
This is where you decide how much to invest in organic search, email marketing, conversion optimisation, etc.
Once again, the best way to approach this is to start from your marketing objectives and work backwards. In the previous section, we looked at how you can set a budget for specific marketing goals, define a maximum target CPA and work out the cost of marketing operations to ensure you hit your targets.
You’ll need to do this for every channel, every strategy and every campaign to allocate your budget with accuracy and avoid overspending.
Know your expenses – all of them
The biggest danger with overspending is that you won’t consider all of the costs that go into creating and managing each strategy/campaign. HubSpot has published a guide to managing marketing budgets that includes a number of free templates, which may help you think of some expenses you wouldn’t normally consider.
In the same article, HubSpot lists the following common costs involved with any strategy:
- Software: When it comes to digital and even print media, you may need software to create your marketing campaigns, or handle your daily processes.
- Freelancers: If you have a temporary campaign or want to test out a new marketing strategy, you might want to hire a short term freelancer before bringing on a full-timer.
- New personnel: When you do hire full-time employees, you’ll want to budget costs including their computer, technology, benefits, and onboarding-related needs.
- Advertising: Budget how much money you’ll spend on paid opportunities such as physical ads, native ads, sponsored content, search engine ads, and social media promotions.
- Content creation: When you create content such as videos, photos, or even blog posts, you’ll need to put paid time into it. Budget how much money will go into creating this content so you can adjust accordingly based on its return on investment.
You’ll need to allocate sufficient budget to each of these resources for every campaign you run. It’s important that you have funds available for these campaign essentials, otherwise you’ll ultimately run out of content to promote or have to pause ad campaigns that are generating perfectly good leads.
Another really important point covered in the same HubSpot article is hidden costs. In the words of HubSpot’s VP of Marketing Meghan Keaney Anderson:
“When people allocate budget for product marketing, they tend to think in terms of product launches and promotional activities. That’s certainly an important part of it, but another area of focus to remember is setting aside resources to conduct research and message testing long before the product ever goes to market.”
Message testing is something a lot of marketers forget to budget for or simply underestimate how much budget may be required. You’re unlikely to find the most effective message first try and campaigns that don’t initially work can still generate a worthy ROI with some testing and experimentation.
If you’ve piled resources into designing a landing page that’s not converting in the way you’d hoped, those resources are wasted forever unless you optimise the page and find a formula that works – something we’ll talk about more in the next section of this article.
Another expense marketers often forget to consider is updating old content. The shelf life of content is getting shorter all the time and the number of leads you generate gradually decreases, even for your best pieces of content. To maintain performance and maximise the ROI from your content, you have to keep it updated.
While this is a relatively low-cost strategy, it’s an essential one that you don’t want to stall due to a sudden lack of budget.
Prioritise your channels
Earlier, we looked at setting budgets based on marketing goals, using the following criteria:
- You want to grow your business by $500,000 revenue in 12 months
- Each customer brings in an average $2,000 revenue
- You need 250 new customers to hit your target
So, now, you’re going to work back from this target to figure out how many leads you need to generate in order to hit your 250 new customer goal. Look at your conversion rates from organic traffic, paid advertising, social media and your other inbound strategies to figure out how many leads you need to generate.
All you need is this simple formula:
Leads required = Target customers / conversion rate
Let’s say you turn 3% of paid traffic into paying customers and you want to know how many leads you would need to generate to hit your target of 250 new customers.
This would give you:
250 / 0.03 = 8,333 additional leads
So, with your existing paid advertising strategy, you could hit your new customer target by generating 8,333 additional clicks throughout the year. Now, you can compare this with your current ad spend and CPAs to see how much it’s going to cost you to achieve this.
This tells you how much to allocate to paid advertising for this marketing objective over the next year.
Run this calculation for all of your channels and compare the numbers to see which of them are most effective, considering time and cost.
This approach to allocating budget ensures that you have enough leads to work with in order to hit your targets. Let’s face it, you can’t convert leads you don’t have and increasing conversion rates doesn’t happen by magic.
However, you can increase conversion rates by allocating budget for tests and experimentation, which allows you to become more ambitious with your marketing objectives and budget allocation.
How to optimise a marketing budget
Optimising your marketing budget is essentially a process of reallocating your budget to ensure it’s being spent to the best effect. Once your campaigns have had time to gather pace, you’re going to find that some of them perform better than expected while others fall short of your calculations.
Likewise, external factors that are out of your control will affect campaign performance, to different extents, as time goes by – for example, new consumer trends, industry changes and economic fluctuations.
As the performance of channels, strategies and individual campaigns changes over time, you want to ensure that your budget is still allocated to achieve maximum impact.
So, broadly speaking, optimising your marketing budget involves two key objectives:
- Optimise channels, strategies & campaigns to maximise performance
- Allocate and reallocate budget to where it makes the most impact
Throughout this article, we’ve looked at how you can set and allocate marketing spend by calculating every expense and ROI. This approach has given you all of the targets and KPIs you need to measure performance and adjust your budget accordingly.
Maximise performance across every channel
To get the best from your marketing spend, you have to optimise campaign performance across every channel. By maximising ROI, you know that your budget is being used to the best effect and you can reallocate spend to increase investment into your most effective campaigns/channels.
Optimising cross-channel performance starts with understanding the customer journey and how it aligns with your sales funnel.
We’ve covered this before in our Marketing Funnel Strategies: 5 Steps to Increasing Sales article where we run through the five key stages of the modern buying process:
- Awareness: The moment a user first discovers your brand, product, offer, etc.
- Consideration: They’re interested but not ready to buy now – perhaps comparing you against the competition or waiting for a special offer.
- Conversion: When a user finally makes the choice to buy (hopefully with you).
- Loyalty: Users who regularly buy from you and find it difficult to go elsewhere.
- Advocacy: Users who actively recommend you to potential buyers.
By attributing channels and campaigns to specific user actions, you can optimise them to the KPIs that truly matter. Here’s an example of a marketing funnel you might have for a mobile application:
To maximise performance, optimise campaigns based on your target KPIs and run conversion optimisation tests to improve results. Take a look at our 100+ Conversion Rate Optimisation Tips To Boost Your Sales article if you’re in need of some CRO tips.
You’ll also find additional help in these articles:
- The Beginner’s Guide to Conversion Rate Optimisation
- 5 Top Conversion Rate Optimisation Strategies
- 17 Must-Have Conversion Rate Optimisation Software Tools
- 7 CRO ‘Best Practices’ That Can Kill Your Conversion Rate
Once you’ve got a solid optimisation strategy in place, you’ll also want to take a look at your entire sales funnel to address leaks. These are areas where your leads are dropping out of the buying process, which is bad news for your marketing budget.
You spent good money on capturing those leads and, for each one that doesn’t complete the buying process, you’re out of pocket. So, to maximise return on investment, you have to put fixes in place to minimise the number of leads who drop out of your funnel before completing the purchase.
We’ve also covered this before in our Funnel Optimisation 101: 5 Steps to Fixing a Leaky Marketing Funnel article where we guide you through the following steps:
- How to pinpoint leaks in your sales funnel
- Determine where you’re losing leads
- Plugging conversion killers
- Refining your lead nurturing strategy
- Turning customers into repeat buyers
By optimising your sales funnel across these five key areas, you’ll prevent leads slipping away and entice new customers to keep buying from you.
With this approach, you’ll be optimising every part of your budget on two fronts. First, you’ll be fine-tuning performance across every channel and (SEO, social media, email, etc.) and testing new ideas to boost results even further. Secondly., you’ll be optimising the journey prospects take after the initial conversion and maximising ROI from the leads you pay for.
Reallocate your budget for maximum impact
With your channels, campaigns and funnel all working at full capacity, you know that your marketing budget is being put to its best use. All that’s left to do now is reallocate your marketing spend, based on results, to ensure that your budget is always invested where it has the maximum impact.
As Jonathan Gordon writes for McKinsey, “with budgets under increasing pressure, marketers must allocate every dollar with precision and purpose.”
“What companies need is an analytical, forward-looking approach that allocates marketing dollars to customer segments as well as products or geographies that have the highest growth potential rather than to those that have traditionally performed well.”
Your marketing budget isn’t a set it and forget it entity, as long as you have the data required to measure performance, model future trends and adapt your spend accordingly.
This is no different from optimising your paid advertising budget on a platform like Google Ads. If a campaign is performing particularly well, the most obvious step is to increase your budget for the highest performing keywords.
Going a little more granular, you might optimise your bids to reflect how keywords perform on different days of the week, weeks of the month or months of the year. As long as you have the historical data to prove that, for example, conversions are 30% higher on weekend mornings, you can model this outcome and increase your bids for these times of the week.
The same principle applies to your entire marketing budget and the opposite is true for campaigns that aren’t getting the results you need.
By reducing spend on these campaigns, you can free up budget to reallocate elsewhere. In the meantime, you can start investigating underperforming strategies to find out why things aren’t working and test variations to improve performance.
This ongoing process of optimisation and reallocation helps you maintain top performance across your entire marketing spend and ensure your money is always being pumped into the most effective channels.
Reduce CPAs and other expenses
Another tactic for optimising your marketing budget is to reduce your cost-per-acquisition and other expenses, such as CPCs. Generally speaking, it’s good practice to keep a constant eye on your data and look for areas where you might be overspending unnecessarily but be careful about over-optimising CPAs.
While it’s great to reduce expenses, you don’t want to limit performance or growth by curtailing your marketing spend.
Let’s think of it this way: any good marketing strategy generates positive ROI, contributing to increased revenue and growth. So, in theory, the more you spend, you get back in return and this should be the mindset you have.
Of course, there’s always a limit to how much budget is available and there comes a point where optimising CPAs is a valid tactic – particularly, if you’re overspending anywhere. Just make sure you don’t fall into the trap of limiting results by over-optimising your spend.
Keep your mindset focused on ROI and what you get back from campaigns, not simply what you’re spending. And, if you need help with calculating the ROI of your marketing campaigns, you can use our free marketing ROI calculator.
Over to you
In this article, we’ve looked at how you can set budgets, based on your marketing goals and calculating expenses vs returns. This granular approach allows you to forecast the value of channels and strategies before you start spending and prioritise allocation, based on your goals.
We’ve also looked at how you can optimise your marketing spend on a channel and campaign basis. By maximising performance across every marketing action, first, you give your budget the best chance to realise its full potential. From there, you can reallocate your budget to invest more where performance is highest and optimise underperforming campaigns to bring them back up to pace.