4 Methods for Setting Your Marketing Budget
What is your budget for this marketing project?
There it is, that same question over and over again.
I don’t know, just tell me the price!
Well, the cost ranges from zero to infinity, so give us a number and we’ll tell you what we can do with that budget.
I want to spend the least amount possible to get the best results!
Then let’s go back to your goal, the thing you are trying to buy. What do you want to get out of working with us?
I already told you! I want to run ads, post on social media, and do an email campaign.
And then the circle continues…
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After a conversation like that, it’s no wonder why agency owners and small business owners looking for marketing help get frustrated.
However, both groups know that figuring out the cost is a necessary process for getting your marketing plan up and running.
So, in this article, we are going to walk through four different methods that your business can use to set a marketing budget. Here are some shortcuts if you want to jump ahead…
Still at the top of the article? Great! Let’s get started…
Top-Down Budgeting
This is one of the most straightforward ways to set your marketing budget. The executive team of a business, or in the case of small businesses, the owner, will look at their historical and current operations costs and pick a number that seems reasonable to them.
Let’s walk through an example.
Say your business brings in $10 million dollars of revenue in 2022. Take out $5 million for product expenses, estimate $2 Million in taxes, with a target of half a million in net profits, and that leaves you $2.5 million. This should cover other costs like employee salaries, administrative costs, and marketing!
If salaries and admin costs are $1.5 million, then that leaves you with a whole one million dollars for marketing.
The biggest advantage of this approach is that it saves middle and lower management a lot of time trying to figure out all the nitty gritty details about what they might need over the next year.
All you need to do is pass the budget onto your marketing team and then it becomes their responsibility to make the most out of that budget.
Bottom-Up Budgeting
The exact opposite of the top-down model is known as bottom-up budgeting. Here, you provide your marketing department (or agency partner) with a goal and they develop a plan to get you there.
One of the primary advantages of this model is that the budget is usually very accurate. Specialists in each department are very familiar with the costs associated with various activities and can give you a much more reliable picture of your costs.
Even better, you may find out that you don’t need to divert that whole million dollars from our previous example to marketing. You might get an extra quarter million to invest in a new product, better equipment, or hire more employees.
Competition Matching
Looking to your competition can be a great way to identify a range for your marketing budget. If you are in an industry where your competitors are very friendly, you might even be able to just ask!
Other places to get some insight would be a marketing agency that you are working with who may have worked with competitors in your local area or by doing a quick search online.
Aside from that, here are a few perspectives that are used to identify a marketing budget.
Age-Oriented
Looking at similarly aged businesses can give you a good estimate of how much they are investing in marketing their companies.
Startups and other small businesses typically invest a larger portion of their revenue into marketing so they can grow quickly. For example, 25-year-old digital marketing agency WebFx mentioned that “businesses between one and five years old should invest 12% to 20% of revenue towards marketing.”
Once businesses pass the five-year mark, their revenue will typically be higher and they can start decreasing their investment into marketing closer to the 6% to 12% range.
Industry-Oriented
Another search tool that you can use is the CMO Survey results that come out at the end of every February and August. For February 2022, they released this table:
| Industry Sector | Percent of Budget |
|---|---|
| Banking Finance & Insurance | 18% |
| Communications & Media | 14% |
| Consumer Packaged Goods | 16% |
| Consumer Services | 4% |
| Education | 4% |
| Energy | 8% |
| Healthcare | 12% |
| Pharma Biotech | 5% |
| Manufacturing | 14% |
| Mining & Construction | 3% |
| Service Consulting | 17% |
| Real Estate | 3% |
| Technology | 44% |
| Transportation | 5% |
| Retail-Wholesale | 12% |
You can just look at the above table to get you an estimate or keep updated biannually by visiting the site yourself at cmosurvey.org and looking for the U.S. Firm and Industry Breakout Report.
Overall Average
In a similar fashion to industry-oriented budgeting, you can simply take the average of business-to-business (B2B) companies and invest the roughly 11% to 12% of your revenues toward marketing. Or, if you are a business-to-consumer (B2C) business, aim for something closer to 10% of your revenue toward marketing.
Goal-Centric
Cost-Per-Results
Your budget decisions should be start with identifying your goal. Learning how to set these goals requires a bit longer of a conversation, but you can get a start by reading our article on setting goals.
Let’s start with an example…
Our goal is to target new customers for our retail business and the metric we are going to use to measure that is new leads (another word for people interested in your product or service).
If we want to get 500 new leads over the next quarter, the next step we need to do is estimate the cost-per-lead (CPL).
This number can come from previous campaigns that you have run or if you are starting brand new, you can look up industry averages online. My personal choice is a quick scan of Wordstream and their yearly Google Ads and Microsoft benchmarks report.
After looking at that report, we can estimate a CPL of about $30. So, with some quick algebra, we can see that our goal of 500 new leads will cost us…
GOAL (500 leads) x COST ($30/lead) = Estimated Spend ($15,000)
And, that’s it! Of course, you may have multiple goals, so the total cost associated with your marketing efforts could increase.
Return-On-Investment (ROI)
Some business owners might not like the cost-per-results model because it doesn’t focus on making any tangible return for the business. This is where we create a goal based on a Projected or Targeted ROI.
Taking our last example of 500 leads at $30/lead, we need to add a couple of numbers so we can finish our equation.
First, we need our average customer lifetime value (LTV), which you should be able to pull from your own records, and our estimated conversion rate that we can also find on the Wordstream yearly benchmarks report.
Now that we have those four numbers, we can figure out our Target ROI.
Starting with our estimated revenue…
[GOAL (500 Leads) x CONV. RATE (3%)] x LTV ($50,000) = Estimated Revenue ($750,000)
Taking our estimated revenue and the estimated spend from our previous example we can now calculate our projected ROI…
[Estimated Revenue ($750,000) - Estimated Spend ($15,000)] / Estimated Spend ($15,000) = Projected ROI (4,900%)
That’s nearly a 50X ROI! Seems like a no-brainer if you’re going to invest your marketing dollars into a project like that.
Closing Thoughts
No matter which option you choose to set your marketing budget, having a plan in place and knowing your business inside and out is the best place to start from and will provide a lot of clarity moving forward with your own marketing team or when you reach out to an agency.
If you need some help working through setting up your own marketing budget or have some questions about how to work with agencies, we are always here to be your partner!
Give us a call at (907) 575-7384 or send us an email at contact@orangesliceak.com.
Or, if you want to reach me directly, send me an email at nathaniel@orangesliceak.com! I’m always happy to help.
