The last time I wrote a budget article was in December 2021, so it feels appropriate to circle back around to this very important topic. We did a podcast/videocast episode of What’s Wrong With Revenue? in October 2022 on budget setting for marketing if you’d rather watch than read.
I still meet CEOs who don’t have a marketing budget or are unclear about how much they should be investing in marketing and over what timeframe.
I think my previous articles were more specific to investments in digital programs and inbound marketing-related activities. Today, let’s go to a high level and look at your entire marketing budget and potential marketing investment.
Before I go into the details, I want everyone to think about your investment in marketing as a permanent part of your business’s financial health. What I mean by that is you would never run a business without financial oversight, like a CFO or controller. You would never run your business without HR oversight, like a VP of HR, a director of HR or even an HR consultant to help you.
Neither of these roles is associated with return on investment (ROI). You don’t look for ROI when you hire your CFO or VP of HR. They are necessary roles in your company. I think you should look at marketing in a similar way.
Don’t misunderstand me. Marketing has to perform and produce results, just like both of those people have to perform and produce results. It’s not as if marketing is without measurement, but I want to downplay ROI in exchange for expected performance.
If you change your thinking just a little, you might find more long-term success from your investment in marketing and your commitment to marketing as a key growth driver.
Back to the budget question.
How much should you invest in marketing? It seems like such a simple question, yet it’s far from simple. Don’t bother using Google to answer this question. The answers that come up are far too generic for me to give them any credibility.
If you want to start thinking about what your investment in marketing should be for the rest of this year and going into 2024, the best way to go about setting this budget is to use the following methodology.
Start by defining specific, measurable and time-bound goals for your growth targets. Do you want to increase revenue by a certain percentage, acquire a specific number of new customers or expand into new markets?
If your growth goals are modest, your marketing investment likely could also be quite modest. If you have more aggressive growth goals, in the 10% to 20% range, then your investment in marketing is going to need to be more aggressive as well.
Calculate how much it costs your company to acquire a new customer. This includes all marketing expenses, such as advertising, personnel and tools, as well as sales-related expenses, like your sales reps, sales managers and the always popular prospect entertainment line item.
If your marketing and sales expenses total $500,000 and you land 200 new customers each year, then your customer acquisition cost is $2,500.
Understand how much a customer is worth to your business over their entire lifetime. This metric helps you gauge the long-term return on investment for marketing efforts.
Everyone asks about ROI for marketing, as I mentioned above, but almost no one knows the lifetime value of a customer. This is a very simple calculation. How much does your average customer spend with you each year and how long do they typically stay with you? Both of these numbers should be easy to get, and so your LCV should be easy to calculate.
If they spend $50,000 a year on average and stay with you for an average of five years, then each new customer is worth $250,000.
Typically, a small company looking for aggressive growth may allocate a larger percentage of its budget to marketing, often ranging from 10% to 20% of projected revenue. However, this can vary widely depending on your industry and goals.
This is where marketing budgets run into trouble.
Most companies invest way too little in marketing and sales based on their goals. We did an entire video/podcast episode on this topic.
While they wouldn’t shy away from investing in a new machine for $250,000, when it comes to marketing, they spend as little as possible. Unfortunately, the results often align with that thinking, and they get as little as possible from their modest investment.
If you want to grow, you’ll have to invest an appropriate amount of money. But instead of simply picking a random percentage, set your goals and then work back, identifying everything that needs to get done to hit those goals.
Add up all that work, all those people and anything that needs to be purchased, and you should have an appropriately aligned marketing budget for the upcoming year.
Here’s a quick back-of-the-napkin calculation. If you’re doing $10 million but you want to do $12 million and you’ll only retain $8 million of last year’s revenue, you’ll need $4 million in new revenue to hit your goals.
If each new customer spends $100,000 over the year, you’ll need 40 new customers. If you have a 50% close rate, you’ll need 80 new proposals submitted. If you only submit for 50% of your sales opportunities, you’ll need 160 new sales opportunities. If only 50% of your sales leads are actual sales opportunities, you’ll need 320 sales leads. If only 20% of your marketing leads are sales leads, you’ll need 1,600 marketing-qualified leads (MQLs), or around 133 a month.
How much do you need to invest to generate 133 new leads each month? What programs, what ad spend, what level of team, what hires, what outside agencies and what technology do you need to get 133 leads each month?
It’s a challenging question, but it’s finally the right question. It’s the math you need to set the right budget.
Analyze what your competitors are doing in terms of marketing. Are they investing heavily in certain channels or strategies? This can give you insights into the level of investment required to compete effectively.
This is an often-overlooked question. How aggressive are your competitors? If they are very aggressive, I’d recommend you respond in a similar fashion or significantly reduce your expected results and growth goals.
With all the math done, now you should start looking at what marketing tactics, channels or programs you need to hit your goals.
Consider the marketing channels and tactics that are most effective for your business. This might include digital marketing, content marketing, social media, email marketing, SEO and paid advertising.
Allocate your budget based on the channels that will deliver the right number of leads. Keep building your programs and budget until you can generate enough leads to hit your goals. If you can’t sustain an investment at that level, consider reducing your goals so you can limit your budget to what you can handle.
This is also important. Make sure you allocate some investment for your team to experiment and adapt your marketing as you learn what works best for your business. Regularly analyze the performance of your marketing efforts and adjust your budget accordingly.
You should see a reduction in cost per acquisition as you get better at running your program. This could allow you to come in under budget or reallocate the savings to ramp up the program even more.
It’s impossible to do the marketing necessary to attract new prospects, engage them on your website or with your content and then nurture them until they are ready to talk to sales without marketing- and sales-related technology.
This should be a consideration from a budget perspective. I recommend clients put aside between $1,000 and $5,000 a month for marketing and sales technology like HubSpot. If you have a large sales organization, you might be looking at $3,000 a month for marketing and another $7,000 a month for your sales reps.
If you’re unsure about the appropriate budget, it can be helpful to consult with marketing professionals or agencies that have experience in your industry.
Not only can agencies like Square 2 give you recommendations on budget based on your goals, but we regularly build a budget for our clients by looking at goals, identifying program recommendations, aligning the necessary technology and considering the resources available to execute the program successfully.
We would much rather work with our clients to help them set an accurate and aligned budget than be handed a budget and have to make it work. Inevitably, that scenario ends up with us telling our clients that they’ve underinvested in marketing and should realign expectations around results.
Let’s not do that. Let’s work together to analyze and set the right level of investment and the right expectations around results, and then let’s overachieve.