Understandably, when business owners think of spending money on marketing they think first of Paid Media (TV, radio, print, digital, SEM, etc.), but marketing budgets should account for so much more than that. In fact, marketing’s whole reason for being is to drive business results, which is why it’s imperative that marketing expenses be taken into consideration throughout the forecasting and goal-setting process.
Business objectives are what dictate marketing strategy. From deciding what to say and who to say it to, to how it should be said and where. If you don’t start with business results in mind, you can end up setting a marketing budget based on what media costs, rather than what you NEED to spend. It’s like going to a car dealership without knowing what your monthly payment should be.
Where do you start?
I’m going to share two ways you can go about budgeting for marketing expenses, but (as I stated earlier) the common denominator between these two approaches is the business objectives. You know your goals. You know what needs to happen in order to grow your business. What you might not know is how marketing will get you there and how, so start by answering these questions first:
- What’s your measurable business objective? How much revenue must be made? In what amount of time? And, for scale, how do these objectives measure against past performance?
- What’s your current market penetration? Are you well seated in your industry, or new? Do you know what your awareness levels are currently? How many of your potential customers are you reaching?
- What’s your current conversion rate? (if you don’t have a current conversion rate, then look at standards within your industry).
- What percentage of gross revenue is dedicated to marketing expenses? (Break this down into its piece parts: advertising, promotional materials, etc.)
The gap between where you are and where you want to go is dependent upon reach (touching as many of your target audience members as possible) and conversion (turning them into customers). How many people can you reach that will find what you’re selling useful, and how do you get them to believe that that’s true.
Approach #1 – Budgeting for reach
This is likely the most common budgeting approach as it focuses on measurement-friendly, demand generating strategies, and follows a formula:
[# of Sales/Customers] X [Conversion Rate] = [# of People You Need to Reach (aka Potential Customers)]
Starting with current conversion rates, you determine how many people you’ll need to reach in order to meet your business objective. The idea is if you reach more of the same people, and maintain the current conversion rate, that the number of sales will increase commensurately.
There are a few risks when budgeting for reach:
- Unless you run a niche business for a specific target audience, the number of potential customers out there is infinite. Budgeting based on potential customers can be an expensive game, so arm yourself with your business objectives in order to ensure marcomm plans stay focused on outcomes rather than simply reaching as many people as you can.
- Conversion rates rarely stay the same. Events like inclement weather, site outages, Google/Facebook/Apple updates, current events, and competition can have dramatic effects. Big lifts in consumers coming in at the Awareness phase of the funnel/customer journey, rather than the consideration phase, can also have a diluting effect and lower conversion rates.
- And, when you budget for reach alone, there’s typically an imbalance between investing in paid channels and other (equally important) ones.
Approach #2 – Budgeting for optimal conversion
Although less formulaic, this approach takes into account all that the customer sees, hears, and interacts with. It’s a holistic approach to budgeting that goes beyond just paid media tactics and includes owned, earned, and shared channels as well.
Think about your own day, and all the media you consume. You might not even realize it’s there due to its ubiquity, but marketing (and its partner, advertising) are everywhere. It’s not just banner ads, TV spots, streaming commercials, and billboards. That’s advertising and paid media. Marketing is copywriting, storytelling, and visual attention-getting. It’s the planned timing and location of message delivery. It’s what steers the conversion engine.
All of these channels require a carefully thought out plan and testing strategy, which requires investment. The biggest risk here is that some of these channels are not as easily measurable as others, but the greater risk is in budgeting for some and ignoring others.
For example: let’s say your investment in search is top-notch. It’s in alignment with competitors, and you have a strong paid position. Your organic search results however are lacking, and recently they’ve performed worse than before because of a new Google update. Coincidentally, your paid search performance also seems to be declining, but there’s no clear answer why. The lack of attention and investment in earned channels (like organic search) and owned channels (like SEO copywriting) has impacted your organic position, and in turn, hurt your paid search ranking as well.
So when it comes to budgeting for optimal conversion, you should think about it in terms of a part of your ongoing operating expenses and a share of the revenue. Dedicating any % of revenue to marketing can feel daunting, especially if you’ve never done it before. There are industry benchmarks and reference materials out there including Gartner’s Annual CMO Spend Survey Research report, but you’ll find most established enterprise-level organizations dedicate 10-12% of Gross Revenue to marketing.
Factors like brand age (established or growing), audience type (broad or niche), business type (B2B or B2C), and cost of goods (high dollar or everyday essentials), should all be taken into account as well when determining how much of your operating expenses should go towards marketing. And, it’s important to reiterate that these industry benchmarks are often inclusive of all departments and responsibilities a CMO might oversee like brand/messaging, customer service, UX/UI/CX, web, demand generation (paid/owned/earned/shared), product/pricing, data and analytics, and more.
Marketing budgets should start with business objectives, and there are two primary ways you can go about it:
- Budgeting for reach, a seemingly more measurable/mathematical approach, focused primarily on-demand generating tactics and paid media channels
- (Recommended) Budgeting for optimal conversion, takes the full customer journey into account, from the first touch to the last, and in some cases even after purchase
Coconspirator is a marketing firm that focuses on strategies that lead to better business outcomes. Learn more about what it’s like to conspire with us at Coconspirator.co, or contact us at email@example.com.