I have been asked many times –
“How should I set my marketing budget?”
There are many articles and advices on how budget can be tabulated based on % of sales – 7%, 6.5%-8.5%, 5%-30%, etc.
Well, it really depends on your industry, stage of your business life cycles and size of your business revenue.
The standard % over sales methodology is flawed because it assumes these:
- Customer Acquisition cost (CAC) is the same across all industries
- Impact of budget is directly proportional to your business revenue
Not true at all.
A start-up inevitably needs to build awareness and establish base demand. It’s unrealistic to peg its marketing budget at, say, 7% of a projected $10,000 business revenue. Conversely, spending 7% of a $1billion business revenue seems extravagant.
I used to manage a portfolio with revenue at the billion dollars level, my budget worked out to be less than 1% of revenue. Having said that, this might not enough for an e-commerce business.
There is no magic formula. So, where do you start?
If you are setting budget for the first time, you can make reference to what your competition is spending.
I used to map out competitors’ marketing strategies by tracking their media tactics and messages. There are more data available today for us to develop a rather convincing reference. For example, if your competitor constantly tops the search listing, it is possible to find out how much you must spend to get there.
My budget forecasts for a 8-figure budget were made up of multiple worksheets. While I used past year budget and revenue growth targets as references, I would make adjustments to different pockets. I looked at opportunities to scale for efficiencies and the needs to accommodate for ongoing commitments. This, I think, is the easy part.
Zero-based and challenge
Even after you have found your benchmark, be ready to challenge it.
Here’s how –
- Zero-based your investment using past performance data to extrapolate the cost with respect to your revenue target
- If the incremental revenue needs to come from different segments, adjust your assumptions on the tactics and respective cost of acquisition
- Don’t forget to activate your existing customer base
Essentially, when you build your budget from ground up, you will find yourself at a stronger position to defend and augment your budget.
By doing so, you are embracing perspective of marketing budget as an investment, not just expenditure.
CMO’s Notes is a series of short reflections, inspirations and lessons from my career in marketing, comms and branding, more generally framed as “Marketing”. M in CMO really refers to “many” as there are many roles the CMOs of today need to live up to