How to Set & Allocate a Marketing Budget
In theory, the more you spend on marketing, the more you should make back in revenue. But, there a few things I want to point out about setting a marketing budget and allocating that budget across different categories:
A lot of marketing is a long-term, not a short-term, strategy. Advertising, for example, should produce results in the short-term. But, effective, sustainable, (and often free/cheaper) tactics like content marketing, SEO, email marketing, and social marketing, are all long-term strategies. They can take many months, sometimes years, before they start to generate ROI. Spending some money on strategically selected advertising should expedite your revenue and pipeline growth.
When you start marketing, everything is an experiment from which you should learn. This doesn't mean you need to run regression analyses or do anything terribly data science-y to discover deep-rooted trends. It means that you're going to figure out what type of images and messages and conversion paths and offers work best for your audience. You shouldn't throw a ton of money at either marketing or advertising until you've tested, learned, and tweaked. Then, gradually increase your budget and see what happens.
Investors, especially in more industrial B2B sectors, generally undervalue marketing. At Strategic Piece, we think there is a huge opportunity to create value for your company by investing in your brand, marketing, and overall customer experience.
Take our recommendations with a grain of salt. Many marketing tips are rules of thumb and, while providing helpful guidance, should always be tested within your own reality and business model.
If you have a tiny overall budget, it might not be worth pursuing marketing right now. AND, THAT'S OK! You can still post to social media and work on growing a broader audience and an email list. Be realistic about time frames and expected results. In some cases - say, you only have a $50 budget for AdWords - it will be so challenging to generate results that you should just spend that budget on something else. Even if that's treating yourself to lunch one day!
When calculating your ROI, remember that marketing is an investment, especially in the early days, and won't bear fruit right away.
Keep in mind your customer Life Time Value (LTV) and your overall Customer Acquisition Cost (CAC). Many investors expect to see a LTV of at least 3-times your CAC. Actually, an excellent LTV:CAC ratio is considered to be 5:1. (Such a high ratio is also a signal that you should be able to grow the business much faster by upping your marketing investment). Once again, treat this as a rule of thumb because your customer churn rate will change significantly over time.
Calculating Total Budget
One long-accepted rule of thumb is that your marketing budget should be about 10% of your expected annual revenue. You will want to boost this amount if you're getting ready for a product launch or planning a major marketing campaign. The percentage may naturally be higher at the start of your company journey.
That said, if you ask Matt, who ran a company manufacturing hardware for the oilfield, he will say that he never encountered a percentage that high. As per our third comment, above, we both think that marketing is greatly undervalued by many in the oilfield sector and offers a significant upside opportunity.
Marketing/sales expert, Mathew Sweezey, reports that top-performing marketing teams spend more on their marketing than their less-successful counterparts. Here's a helpful slide from his presentation 5 Key Traits of High Performing Marketing Teams:
Allocation
Once you've set your budget, how should you allocate it? Well, we recommend following the breakdown between headcount, programs, and tech + other featured in the image above.
We also like a formula that many marketing leaders - including Scott Brinker and Coca Cola - suggest, and which is followed by large and small marketing organizations alike: 70-20-10.
70% of your budget should go to marketing activities and tactics that you are either sure are going to work (proven) or you think are the most likely to work (because if you're a startup, everything is an experiment)
20% should go to what you think is likely to work, but not as sure. I suggest thinking of this as a 50-50 probability.
Finally, spend 10% on your wacky and crazy ideas. Odds are they won't work - but they just might. And the payoff might be worth it.
Planning Your Budget
If you'd like some help planning out your marketing budget, here's a link to an Excel worksheet that we have populated with the 70-20-10 allocation and Mathew Sweezey's target budget for fast growth (because we assume you will want to grow quickly!)
This blog post was originally published on February 11, 2020.
