How to set up a marketing budget from scratch

Photo credit: Sharon McCutcheon

Established companies tend to take last year’s budget and increase it by inflation to get to next year’s: not a great process in any case, and useless for a new venture without any precedent…!

Take a percentage of sales maybe? why not. 5%? 10%? That top down approach might give you a (fairly random) overall number but no clue whether it is the right amount or how to spend it, so let’s skip that one as well.

In my experience, there are only a couple of useful methods to set up a marketing budget from scratch:

• zero-based budgeting (aka ZBB). This works as well for established as for new businesses. It’s fairly simple: take all the activities we think (or know, if they have a successful precedent) we need to grow our business next year: a couple of trade shows, some digital marketing, PR, and a few other things maybe. We can then cost the various activities and arrive at our budget. If it’s not your very first budget, you can look at the funnel and try and compute an expected ROI by activity and for your total marketing budget (ROMI), optimising the spend based on tests and learning what works / doesn’t. To be honest, this is not my favourite method, as it relies mostly on personal convictions rather than evidence: great if you already know what you want to do. But to be true to the spirit of ZBB, you’d need to start from scratch every year and reconsider every single activity: few use it that way, instead using it for the first budget and then falling back into the “just add inflation” trap.
• the second method is to look at your competition: who do you want to beat? Then you can try and do some competitive monitoring to understand what they do marketing-wise and estimate how much they spend. If you want to be 10% of their revenue size, then you likely should spend at least 10% of what they spend. If you want to be twice as big, well, you know what to do! As a rule of thumb, to drive your market share up, your share of voice should be higher than your target (the share of voice is the % of visibility you get in your category, mainly media driven). This said, unless you’re competing with public companies, it’s not easy to get accurate numbers on marketing spend, so I’d suggest to use that method as an additional check point, not on its own.
• my recommended method is the “bottom up”, but it doesn’t provide an immediate number as it’s more of a discovery approach: indeed, you first need to do a few tests to find out your most effective channels (eg facebook, linkedin, trade event, etc), target audiences, and messages. The objective is at two levels: firstly, get an idea at the micro level of what specific activity works (ie delivers an ROI) and -if possible- the inflexion point where spending more doesn’t deliver as much (aka diminishing returns). You can thereby prioritise activities, focusing your spend on whichever will get you the best bang for your buck, optimising your spend. Secondly, at the macro (ie aggregate) level, once you’ve got the list of activities that deliver an ROI, you can now compute your CAC (cost of acquisition) and customer LTV (lifetime value). This is the most powerful approach, as you build a result-driven budget. Indeed, now that you know your CAC you can go back to your business objectives (eg revenue targets or number of desired customers) and get an idea of budget (if it costs $10 to get a customer -the CAC- and that customer on average spends $15 per year with your business, then you’d need a budget of $100 to get to a revenue target of $150). Even better, you can check whether you can grow profitably by comparing to the LTV: if the customer lifetime value is higher than the CAC, all good; if not, then you need to find ways to reduce your CAC over time or get your customers to spend more… This takes a lot more work than any other method, but has the benefit of being customer driven and giving you a “commercial proof of concept” of whether you can grow your business profitably or not. Not bad!

A few rules of thumb:

• as mentioned above, try to “test and learn” before committing big budgets, to reduce your risk in case the activity doesn’t work as well as expected.
• if you’re a relatively new business, don’t worry about spending to build your brand. Established businesses are likely to spend c. 60% of their budget on brand building activity (longer-term returns), but a new business should ensure cash comes in and therefore should spend hardly anything on pure brand building for the first few years. It might sound counter-intuitive, but by spending on tactical, sales-driving activities you will indirectly grow your brand (as a result of being in market and the corresponding user experience) and the revenue from the sales will enable you to put some $ aside for brand building later on.
• build a scorecard that follows your sales & marketing funnel, from lead generation to lead nurture to lead conversion. This is true for both B2C and B2B but especially important in B2B due to the longer sales cycles, where your aim is to increase velocity (speed up the process).

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