From my experience, most marketing departments approach the budgeting process in one of two ways:
- They don’t.
- As a flat percentage of current turnover based on your industry.
Both are a problem.
You can’t plan without a budget. That should be pretty obvious. What’s perhaps less obvious is why using a flat percentage of current turnover is (for most businesses) little better.
If you are a large and stable organisation with modest growth ambitions of perhaps a couple of percent a year, then fine – you can probably use a flat percentage based on your turnover. However, most organisations aren’t large, stable and unambitious. Most organisations are nowhere near where they want to be and therefore want much more significant growth. That could be 5%, 20%, perhaps 100%, but this is the figure that matters.
Let’s put it another way. If we have two organisations:
- Company A has a turnover of £10 million. It’s goal is to grow by 2% over the next year, to £10,200,000.
- Company B has a turnover of £5 million. It’s goal is to double in size over the next year, to £10,000,000.
According to most budgeting rulebooks, Company A will be spending more on marketing than Company B. You can see the problem.
Zero Budgeting
Before we go any further, it’s worth mentioning the importance of zero budgeting. Zero budgeting is where a company challenges every cost before the start of a new period. As the owner of a small business, I cannot imagine any other way of doing it – In fact, I would just call it “Budgeting” – but most companies above a certain size are built on status quo, and the primary goal of management is not to disrupt things. This is precisely why most large companies work on a simple % for their marketing budget – it’s simple and has always been done that way.
This is nonsense. Every cost should be questioned. That’s not to suggest that this is all about stripping them out. On the contrary, there will be areas that require a MUCH higher spend than you’re used to, but the money will only be available if you approach the whole thing as a blank canvas.
Setting your marketing budget
So, back to our budget projections. There are three components:
- Your revenue
- Your industry
- Your growth target
Your starting revenue will likely determine your available cashflow and will be a strong indicator of the machine you are trying to feed, but on its own it doesn’t tell us much. To start narrowing things down we need to distinguish by industry:
In order to get a good sense of how much is spent in your industry I would suggest speaking to an expert in that market (and often each niche within the market will be very different), but some examples from my experience include:
- Most professional services (law, accountancy, recruitment) – 3-4%.
- Enterprise software – 12-14%
- Manufacturing – 6-8%
- Retail – 15-20%
- Ecommerce – 20-30%
You will notice that the B2B organisations will tend to spend a lot less on their marketing department, and that’s because the majority of their new business spend goes towards individual customer acquisition experts that sit outside the marketing function. We call them sales people (the problem of marketing and sales being treated as entirely distinct functions is a topic for another day). An ecommerce business, on the other hand, may not have a sales team, so every penny of their customer acquisition and retention is flowing into marketing.
And finally, we have your growth target, which, as explained, is usually the component entirely absent from most budgeting formulas. I would suggest:
- Growth of 5% or less over the next 12 months – use the standard figures above, so professional services would be 3-4%, for example.
- Growth of 10% – multiply by two, so for a PS firm you would be looking at 6-8%
- 20% – multiply by three, so 9-12%
- 30% – multiply by four, so 12-16%
- 40% – multiply by five, 15-20%
- Etc
This is clearly still a very crude methodology but at least now we will be starting to build a budgeting model that bears some resemblance to reality.
So, for example, a recruitment company with £5 million turnover looking to achieve modest growth of 5%, could probably invest around £125,000 and be optimistic that they would see the return. However, another of the same size looking to grow by 30% in the next year should budget around £700,000. That will sound like a shit load of money to a recruitment firm of that size, but growing from £5 million to £6.5 million in 12 months is not going to happen without serious investment. This may eat into most of their profit for that period but few companies can expect to achieve significant growth whilst simultaneously maintaining profitability. The simple recognition of this fact is why tech start ups (designed for growth) are so difficult for conventional organisations (designed for profit extraction) to compete with.
Keeping growth viable (if not profitable)
Just because we’ve set our budget, that doesn’t mean that we need to spend it. The purpose of a budget is to set expectations – it is not a obligation to spend. This is why we need a cost per acquisition model.
Of course there is always going to be some sunk cost that can’t be avoided (hosting, website build, visual identity, brand activity, etc, the value of which will be impossible to calculate for some time, if ever) but the vast majority of your spend should be geared towards direct response activity. In other words, activity that drives a specific action, and if it drives an action, then it can be measured.
This is where a Cost Per Acquisition model can come into play. Cost Per Acquisition is exactly that – the cost of acquiring a customer or a lead. The basic premise is that if the CPA is less than the (profit) value of what you’re acquiring, then it’s worth doing. Again and again and again. Until, that is, diminishing returns raises the CPA to the point that it is no longer profitable, at which point you stop.
Examples of this could include:
- Data capture via LinkedIn or Facebook advertising.
- PPC.
- Driving people to events or webinars.
- List purchasing.
- Telesales (although that typically won’t fall under the marketing budget)
Of course this does demand that you actually have a cost per acquisition model, but it’s not complicated (varies slightly for business to business but if we take a professional service firm the CPA figure (the maximum amount you can spend on a lead whilst maintaining profitability) will be sum of average lifetime customer spend, multiplied by your profit margin, multiplied by your conversion ratio from lead to sale) and once you this it means that we can spend your marketing budget within a framework that ensures profitability and positive cash flow.
If your marketing department is unable to achieve the growth targets within this CPA figure, then you have a decision to make. Either reign in your targets, or accept that achieving your growth is going to damage your P&L in the short term. That may be okay, but it’s important you have the data to make that call.
How to split your budget
This blog post is not going to go into the specifics of budget allocation across every channel, largely because that will always depend on the specific business in question. However, there is no point getting the right budget if some fundamental rules aren’t then followed:
- Don’t spend anything anywhere until your brand is in decent shape. That needn’t mean delaying for 12 months while you hire a team of overpaid marketing wankers to create lots of powerpoint presentations, but you need to be happy that the fundamental pillars of your identity (core, vision, values, position, personality, tone of voice, etc) are clear and that they are well articulated across your primary marketing assets, particularly your website. Otherwise, for every pound you spend, you will only be getting a percentage of the return possible.
- 20% on content. 80% on promotion – there is a tendency for companies to create WAY too much content – often of a pretty mediocre standard – then allocate little or no funds to promotion. This is particularly common where the content is created in house – after all, you need to keep that marketing intern busy and all they’re really capable of is churning out some forgettable blog content – but there is absolutely no point in creating something that never reaches its audience. Instead, you need to focus on small quantities of breathtakingly good content and then stick the other 80% into promoting it far and wide. And I’m not just talking about advertising. If you’re targeting a small proportion of B2B senior decision makers, for example, then the promotion may be in the form of events or even telesales.
In summary
Most marketing budgets somehow manage to be both simultaneously wasteful and unambitious. They are wasteful on those channels where money is being spent for no other reason than it always has been, and they are unambitious on others where nobody has a handle on the numbers and has noticed that a profitable and scalable cost per acquisition exists.
And because nobody has taken control of this mess, senior leadership teams are reluctant to sign off larger budgets, so targets grow while resources remain flat. Sound familiar?
The only solution is for marketing to seize the reigns and build a simple budgeting model that demonstrates a clear understanding of the market, their targets for growth, and the commercials of each channel that will help them reach that target. Do that, and you soon find that large pockets of budget mysteriously emerge.
Dan
