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2021-07-22 05:18:57 Media Heroes

How To Create A Marketing Budget That Generates Big Profits [Guide]

Alistair Roberts
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Marketing is a tireless electric motor that creates leads for your business day after day, week after week, and year after year. It sustains itself with the profit that it makes for the business, and must be consistently recharged throughout the year to continue its drive forward, lest it comes to whimpering halt.

But how much investment does your marketing department need to sustain itself, and continue its drive forward? How can you ensure that you’re not putting limits on your own growth? 

In this article, we’ll explain how to create a marketing budget in the most practical way possible: based on an ongoing assessment of what makes you money. A marketing budget shouldn’t be based on an arbitrary value (like 10% of your revenue), or copied from last year’s spend. This is missing the point entirely. Marketing is an engine for growth, and needs the amount of fuel that will maintain or increase that growth. And the most effective way to do this is to invest your marketing dollars in the methods and campaigns that generate the best return.

Key points

  • Executives often underestimate the value of marketing, and find its outcomes difficult to quantify because they are rarely presented in financial terms. This makes it difficult to know how much to budget for marketing, or what returns are realistic.
  • Traditional approaches to setting marketing budgets tend to be arbitrary (e.g. a percentage of revenue, or last year’s budget plus or minus a percentage), and aren’t tied to business outcomes.
  • To measure profit, marketing methods should be split into two types: foundational methods that make money, and supplemental methods that make campaigns more efficient.
  • Select marketing opportunities based on your business goals, calculate the expected profit from alternative marketing campaigns, and then prioritise them based on this. Invest in the marketing campaigns that make you money, and set your budgets proportionally. Then keep refining and reinvesting.

Bridging the gap between C-suite executives and marketing

Confused business executive
Executives want to know about profit and revenue, not clicks and impressions

Many marketing managers find themselves fighting for their budget each year, but arm themselves with "vanity" metrics like clicks, impressions, and website visitors. These bounce off the shields of executives, whose defences can only be punctured by what they know best: the bottom-line profitability of marketing. Talking to them about clicks and visitors is like speaking an entirely different language, so marketing managers come away feeling deflated, and executives might wonder whether they need the marketing department at all.

Most executives just want to know which marketing methods are driving leads, sales, and profits (which is why they communicate with the sales department so well), and how much to re-invest in them. So it’s critical for marketing managers to understand how to convert marketing into these terms, otherwise, marketing managers have lost the fight before they enter the boardroom.

Thankfully, profits can be calculated for many marketing methods and presented to executives in this format, allowing them to make an informed decision on next year’s budget for marketing. Even in circumstances where it’s more challenging to directly link marketing outcomes with profits in the short term, linking marketing outcomes with business outcomes and profits is critical, as this is the only way to bridge the gap and encourage everyone in the organisation to speak the same language. But before we jump into how to create a profit-focused marketing budget, we’ll quickly cover the traditional ways of setting marketing budgets.

What are the traditional ways to set a budget for marketing?

Marketing budgets are usually set in a few different ways:

Last year's budget

This method starts with last year’s number, and is a simple case of keeping it the same, increasing it, or decreasing it after some debate. This is often the default method, because many marketing managers struggle to tie campaigns to profit or business outcomes, so executives find it extremely difficult to justify a budget for the new financial year.

This can result in simply giving the marketing department the same budget as last year, because it’s the easiest thing to do. However, if the marketing budget is up for debate, marketing managers may approach their marketing budget by trying to justify a percentage increase from last year’s budget based on vanity metrics, or they may find themselves fighting to defend their marketing budget if the business has experienced a challenging year and is looking to cut budgets. Either way, this approach is not in the best interest of the organisation, and sets marketing and executives up for battle rather than being on the same side.

Percentage revenue

This is where the marketing budget is based on a percentage of revenue. Executives understand that marketing is valuable, but again, because it’s rarely tied to financial performance, they don’t understand how valuable. So they might select a marketing budget based on a percentage of revenue from the previous year or based on what they are forecasting in the next financial year, as this seems to make sense. It's also common to base the percentage of revenue figure on industry benchmarks, or worse yet, a rule of thumb from an article or blog, neither of which have anything to do with the performance of the business.

Competitor benchmarking

Some executives put faith in their competitor's logic, and select a marketing budget based on what they think they are spending. If those businesses are putting X amount of dollars into their budgets, surely they know what they’re doing? This puts the power into your competitor’s hands, and is divorced from your own business goals and needs. This method is often used as a justification from marketing managers to increase marketing spending and it can be a useful reality check, but unless the marketing budget is used to generate increased profits, rather than simply keeping up with the Joneses, it’s likely any marketing budget increases will be short term and unsustainable.

Zero cost marketing budget

The worst of a bad bunch! This is where the executives see marketing purely as a cost-centre and focus on trying to spend as little as possible on marketing. The goal here is to drive marketing spend to zero. Marketing managers are left to fight for the scraps and ultimately any valuable marketing team members are likely to leave the organisation. In the short term, the reduced marketing budgets cut costs and this may temporarily increase profits, but this lack of marketing will either slow, stop, or reverse business growth, and by the time the executive team realise that marketing was valuable after all, it may be too late. Marketing is and always should be seen as an investment, so a zero-cost marketing budget method just doesn’t make sense. Marketing is a profit-centre, and it’s the responsibility of both the marketing managers and the executives to establish marketing campaigns and marketing budgets to generate a measurable return on investment.

While these methods can have some merit, none of them are tied to financial outcomes for the business. So the budget for your marketing campaigns for the entire year is based on an imprecise, whimsical number that could put the business at risk by overspending, or be a tragic underspend that fails to grow the business as much as it could.

We propose a much more efficient method: a profit-focused marketing budget.

What is a profit-focused marketing budget?

A profit-based marketing budget is one based on the marketing campaigns that make you money. This takes the guesswork out of marketing budgets, allowing you to identify the campaigns that produce the most revenue for the company, and then invest back into them. It also allows you to experiment with "supplemental" marketing campaigns with confidence, knowing that they're always backed by proven money-making campaigns.

Here's more info on how profit-based marketing budgets work.

The two types of marketing methods used in profit-focused marketing budgets

To market successfully, we must understand which methods generate measurable profit. Only by accurately measuring the methods that make you money can you set an appropriate marketing budget—if you don’t know what’s profitable, how will you know what to invest in?

We’ll call these profitable methods foundational, because they’re the methods that are clearly making you money, which makes them the bedrock of your marketing. Typical examples of foundational marketing are Google Ads, social ads, and SEO.

Methods that are more difficult to tie to revenue are supplemental. These can be extremely valuable because they make your foundational methods more efficient by providing more traffic and engagement, but they cannot be directly measured with leads, sales, or revenue, so they must always be funded with the profit from your foundational methods. Common examples of supplemental marketing methods are social media, content marketing, and email marketing. Before pursuing these techniques, your marketing strategy needs a core group of profitable methods—a solid foundation that consistently generates revenue, providing the leeway you need to experiment with other methods. Over time, and when executed correctly, you’ll find that SEO, social marketing, and content marketing can turn into goldmines. But you always need a strong marketing foundation before starting to experiment with supplemental campaigns.

Why bother with supplemental marketing methods?

If supplemental marketing methods can’t be tied back to revenue, why bother? There’s a few key reasons:

  • They drive your foundational methods forward by making them more efficient. This is achieved with extra visitors, more engagement, and increased brand awareness.
  • You’re reducing your risk by spreading your marketing across various methods, rather than having all eggs in one basket. So if one fails, you have others to back you up.
  • Supplemental marketing techniques can also help to bring people into your sales funnel, as well as push them through its various stages. For example, someone might become aware of your business through your blogs (content marketing), decide to subscribe to your social channels (social marketing), and after being bombarded with enough engaging content, might decide that they like you enough to use your services.

How to create a profit-focused marketing budget

kid money jarYour marketing budget should be based on methods that  turn a profit

This is a broad overview on the steps needed to achieve profit-driven growth for your marketing—a budget for marketing plan that focuses on what is important.

1. Outline your business goals

The whole point of marketing is to help achieve your business goals, so to set an accurate marketing budget, you’ll need to tie the two together. List your revenue or profit-based business goals. For example:

  • Increase profit by 10%
  • Increase leads by 20%
  • Increase market share by 5%

2. Calculate profit from each lead

Most business goals are financial, and so can almost always be measured by leads. But leads can’t help you to determine a marketing budget unless you know how much they’re worth, so you’ll need to identify your average annual profit per lead (short term value), and also your average customer lifetime value (CLV) per lead (long term value).

For example:

  • Average annual profit per lead: $100
  • Average CLV per lead: $500

3. Define your marketing methods 

Now that your business goals are clear, and you know how much your leads are worth, you can define your marketing methods and tie the two together. 

In this step, list out every marketing method that you’re currently engaged in, and also any new marketing methods that you want to try. For example, you might include Google Ads, social marketing, and SEO as your methods.

Once done, create a table with the below columns, and add your methods to it.

Campaign

Method

Number of leads

Cost per lead

Budget needed

Months to mature

Average annual profit per lead ($100)

Customer lifetime value ($500)

Google Ads

             

SEO

             

Social marketing

             

Content marketing

             

4. Populate the table for your foundational methods

Populate each column in the table for your foundational methods. Here’s how.

Type

The type is either foundational or supplemental, as discussed above.

Number of leads

For your foundational methods, add the typical number of leads that you want to achieve, based on your business goals.

Cost per lead

This is a tricky one, but can generally be estimated using benchmark studies, or through the experience of a marketing agency who know what’s realistic for each marketing method.

You would normally start with a realistic assumed number, and then you can measure this against your assumptions when reporting, so you know if you’re on the right track.

Budget needed

This is calculated with the following: number of leads per year or per month X cost per lead. You would normally need to start with a realistic minimum budget for a particular marketing campaign, and when you calculate the number of leads you want to achieve, you can have a target for the short, medium and long term, so you can scale up your investment as you see results.

Months to mature

This is the time needed to achieve the targeted number of leads. Some campaigns will be much quicker than others—for example adverts can get leads quickly, whereas SEO can take many months to mature and bear fruit. Having a balance of short and long term maturity campaigns is often important, so you aren’t asking executives to wait too long to see the promised results.

Average annual profit per lead

Calculate the average annual profit per lead with the following: (number of leads X average annual profit per lead) - marketing campaign budget.

Customer lifetime value

Calculate the customer lifetime value with the following: (number of leads X customer lifetime value) - marketing campaign budget

Campaign

Method

Number of leads

Cost per lead

Budget needed

Months to mature

Average annual profit per lead ($100)

Customer lifetime value ($500)

Google Ads

Foundational

50

$50

$2,500

1

$2,500

$22,500

SEO

Foundational

50

$25

$1,250

6

$3,750

$23,750

Social marketing

Supplemental

n/a

         

Content marketing

Supplemental

n/a

         

5. Populate the table for your supplemental methods

Now that you can clearly see how much profit your foundational methods are generating, you can assign budgets to your supplemental methods based on what the business is comfortable with spending. In the example above, the budget needed for the ‘foundational methods’ is $3,125 but the annual profits are $6,250, with much bigger lifetime profits to be realised in the future. Now you can allocate some of the forecast annual foundational profits into the supplemental methods to ensure the whole strategy works as efficiently as possible. In the table, we have been very conservative and only reinvested an additional $1,000 in supplementary methods, but it shows the principle of how to approach this.

Campaign

Method

Number of leads

Cost per lead

Budget needed

Months to mature

Average annual profit per lead ($100)

Customer lifetime value ($500)

Google Ads

Foundational

50

$50

$2,500

1

$2,500

$22,500

SEO

Foundational

50

$25

$1,250

6

$3,750

$23,750

Social marketing

Supplemental

n/a

Unknown

$500

3

$0 assumed

$0 assumed

Content marketing

Supplemental

n/a

Unknown

$500

3

$0 assumed

$0 assumed


By assuming that the supplementary marketing methods have a $0 assumed profit, this sets you up for success. You can focus metrics for these supplementary methods on their realistic purpose, where diagnostic metrics rather than profit metrics are likely to be far more appropriate, plus if some leads or sales can be directly attributed to these methods, then that’s just the icing on the cake.

6. Decide which methods to go for, and calculate the total budget

Work out the best combination of methods to achieve your business goals, based on how profitable each method is and how quickly you want to achieve them. In theory, the biggest budgets should be assigned to the methods that make the most money. If you’d like quick short-term growth, you may want to invest your dollars in Google and social ads, and supplement this with some longer-term SEO.

Once you’ve decided, tally up the total budget needed for each method. This will give you your total marketing budget.

7. Decide what you can comfortably afford

Compare the total marketing budget cost with what the business is comfortable with spending. Essentially—what can you comfortably fund for the first 3, 6 or 12 months? You need to pick a realistic period for which you can produce results, and the business needs to be able to commit to this without creating undue financial pressure.

8. Rearrange methods if needed

If you need to, rearrange the budgets for each method in line with what the business feels they can commit to financially, and potentially pair back on the business goals to find the sweet spot between your goals and the budget needed to achieve them. 

To reduce financial risk, you could split your marketing strategy into stages, starting with the methods with the fastest payback or a combination of long and short term returns. This could be paired with a performance target that when achieved, prompts you to increase your budgets for longer-term methods.

9. Confirm the strategy

Confirm your combination of marketing methods and budgets into a complete strategy and ensure it all works well together. You’ve now created a marketing strategy and budget based on measurable profit, with in-built performance metrics that executives can clearly understand. As a result, they’ll be much more inclined to give you the thumbs-up, and allow you to realise the potential of your marketing campaigns.

No annual marketing budgets. No haphazard values based on random revenue numbers—just proportionally investing your profit back into the methods that are profitable, and measuring their performance monthly or quarterly to make sure you’re on track (and making adjustments as needed). This balanced, proportional approach ensures that you’re budgeting the right amount, without underspending or overspending.

Summary

The key to setting an accurate marketing budget is knowing what makes you money, and then investing back into it. While you can have some success basing your budget on industry benchmarks or percentages of revenue, these are unscientific approaches that fail to create a clear picture. Industry benchmarks are sanity checks at best, and a financial disaster at worst. 

By precisely measuring the value of your leads, you can invest your marketing budget in a combination of foundational money-making methods, and supplemental methods that boost their performance and may eventually become profitable in their own right. 

When profit is brought front and center, marketing managers will no longer need to justify their team’s existence with vanity metrics that are meaningless to executives. Instead, they can show a definitive breakdown of which marketing methods make money, how much they make, and how much should be re-invested in them.

Topics: Marketing

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