How to determine your marketing budget

Lately, I’ve had a number of people ask me about how to set a marketing budget.

In some cases, people are trying to figure out their entire marketing budget, and in other cases, they’re looking to understand how to budget for a specific project.

I’ll show you how to do both.

For your overall budget

Your overall marketing budget can be looked at in two different ways:

1. Using a percentage of annual revenue
2. Setting the budget and then backing into it

Percentage of Revenue

Companies are typically advised to spend between 7%-13% of their annual revenue on marketing. Generally, this doesn’t include payroll and overhead. This is for direct spend on agencies, vendors, contractors, ad spend, software, etc.

So, if you have a $1,000,000 company, $70,000 – $130,000 would go toward marketing. From there, you would allocate funds toward your different initiatives.

For companies seeking to grow, you may want to instead take 7-13% of your target annual revenue. So, let’s say you were a $1m company hoping to grow to $2m, your marketing budget should be $140,000 – $260,000.

This is the option I most commonly recommend for setting a full marketing budget.

Back into it

Another option, that is extremely common, is to pick a number and then figure out if that covers everything you’re trying to do. If it doesn’t, either cut some of the things you want to do, or add more budget. Easy-peasy.

You can also reverse that. Start adding up everything you hope to do and then propose that as the marketing budget. If you’re working with external vendors, get a few quotes so you’re sure that you’re in the right ballpark.

Neither of these methods is particularly scientific, but they are both common enough that no one would fault you for doing it.

In either case…

Make sure to prioritize the items on your list based upon their likelihood to generate a positive ROI, or that serve your other non-revenue generating marketing goals. The formula in my head that I use looks like this:

{cost x likelihood of generating measurable results x targeting}

I want the most precise targeting, at the best cost, with the highest likelihood of results.

This typically results in digital marketing outperforming traditional offline marketing, intent-driven marketing outperforming interruption-based marketing, and spend on popular channels with precise targeting outperforming niche channels with broad targeting.

For a particular project

When looking at a campaign or distinct project, consider the ROI. In general, any project that returns money to you is a good project. When you put in $1 and withdraw $2, you should be pretty happy.

For an advertising campaign, your budget is dependent on the value of a lead or sale. If you sell $6 socks, your ad model is going to look a lot different from a company selling 12-month consulting services for $200,000. Your lead-to-sale percentage is also very important in considering your budget. And don’t forget to think about profit margin.

For all of this, you’re going to need to build a model to determine when you hit profitability.

• If you close 40% of all leads, and each sale is worth $1,000, then each lead is worth $400.
• 10 leads would result in $4,000. If you paid $400 for each lead, you would spend $4,000 and break even.
• Therefore, if you can get your cost per lead to $100, then you make $3,000 on every 10 leads.

Your goal, as in all things, is to spend as little as possible and make as much as possible. There are two calculations to keep in mind.

ROAS

This is how you calculate ROAS (Return on Ad Spend).

ROAS = Revenue / Ad Spend

Your target ROAS should probably be 3/1 with the goal of improving it over time.

ROI

When you want to go deeper, you need to start factoring in all of the costs so you get a true return on ad spend.

For instance, in the example above, if you have someone running the ads for you, and they charge you $250 per month, it’s not going to sink the profitability of the campaign. If they charge you $2,500, it will.

ROI = (Total Income – Total Expense) / Total Expense

Just as with ROAS, your goal should probably be 3/1 (3:1, 300%, or 3) with the goal of improving it over time.

Make sure to look at both return on spend and return on investment.

Will it work?

One thing people always want is certainty. They want to know “if I spend X, how many leads will it bring in?” Unfortunately, there are entirely too many variables to ever answer this accurately. There are some things we can predict within a certain margin of error, but they are primarily costs and leading indicator metrics.

Here are just a few of the variables that contribute to whether or not someone buys from you:

• The quality of your product or service
• The quality of your brand
• The quality of your content
• The competition
• The economy
• Timing
• …and that’s just a few

This doesn’t mean it’s all guesswork. It just means that you have to start somewhere and improve over time. You won’t know what’s working and what’s not, until you look at the data and make adjustments along the way. Knowing your goals and your budget are the best starting point.