Tuesday May 26, 2015

How Should You Set Your Marketing Budget?

Over the years, I’ve noticed that a couple common things can happen when small businesses set and reassess their marketing budgets.

Money

For some businesses, there’s a yearly ritual when putting the annual plan together. The business owner reviews the total marketing expenses for last year and decides whether the budget should go up or down based on a factor of their revenue, and decisions to add or cut are made from there.

For other businesses – including a significant portion of both new and established businesses – the reality is that there is no defined marketing budget; the “budget” is just the money left over when the other expenses have already been covered.

If you’re in either of these camps, you’re not alone. The problem with both of these approaches is that your marketing budget isn’t being assessed based on the goals, targets or objectives it’s designed to achieve. When this budget is seen as an expense rather than an investment, it’s almost always the first thing that gets cut. And that can be a big mistake.

*Related: Download our handy calculator to determine your Customer Lifetime Value*

Developing your budget is a math question

Let’s get the obvious stuff out of the way: every industry is different, budgets can be affected by a variety of factors, there’s no one right answer – and so on. All true, none of it particularly helpful to you.

The good news is that developing your budget is really just a math question. The part that many businesses struggle with is defining the variables that let you set up your equation.

So how do you define your variables? Start with your business’s biggest objectives and work your way down. Ideally, your marketing resources will be involved in the strategic planning process; this helps ensure that you have a clear vision, goals and targets that keep your business on the right track, and that the marketing strategy is designed to help you achieve these targets. It’s important to make sure your goals are both realistic and meaningful to you and your team; otherwise, you can count on them being missed or forgotten completely.

Using goals to set your budget

Your goals are the variables that let you set up your marketing budget math equation. Some goals are more tangible and easier to measure than others, but it’s critical to make these as concrete as possible. (“More business”, bad; “$2 million in annual revenue in 2015”, good.)

Before finalizing your budget from here, you want to know what a reasonably expected return will be for the channels you’re considering. The steps for projecting and assessing returns are outlined in more detail in our post on calculating marketing ROI, but the highlights are as follows:

1.       Track leads by channel
Always tag leads by channel and use a CRM (or at least a spreadsheet) to keep track of everything

2.       Determine channel cost
Track your expenses by channel – including any hourly costs to manage

3.       Determine average client value
Define how much a single client produces in yearly revenue, on average

4.       Determine sales conversion rate
At what rate does your sales team convert leads into business?

5.       Determine your magic number

Average Client Value x Sales Conversion Rate = Magic Number (how much you can pay for a lead to break even)

Now, you can look at what you’re paying for leads with your current channels (or use industry averages if you haven’t tested them before):

Channel Cost / Total Channel Leads = Cost Per Lead (CPL)

Taking the time to define these numbers will prove extremely beneficial. With this framework, you can determine what budget is needed to hit your goals and what your marketing should be accountable for. When reassessing your budget each year, you can use this same framework to determine which channels are the most cost-efficient, which should be scrapped and where you should reallocate based on your evolving targets.

Ready to stop guessing and start optimizing your marketing budget?

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