How To: Data-Driven Digital Marketing Budgets
How to calculate a marketing budget breakdown for your small/medium business that isn’t totally bananas (and isn’t just a % of your revenue)
If you Google “How to calculate a marketing budget”, you’re hit with dozens of articles that are only a few paragraphs long that say “simple - just take 7-20% of your revenue and BOOM, you have your total marketing budget for the year!” And you’re probably sitting there scratching your head (or at least you should be) because we aren’t answering important questions like:
How do we distribute that budget between channels?
Does that include headcount, agency fees, and creatives? Or just spend?
Why is it 7-20%? How does that help me stay on track with my business?
What does that get me as far as business growth?
How to allocate budget for digital marketing? (vs traditional)
What is the average marketing budget for companies like ours?
Regardless of the size of your company - this advice by itself is crap. Why? While you don’t need to spend weeks calculating the perfect marketing budget if you are a small business (you probably will if you’re a major publicly-traded company) you should put more thought and analysis into your marketing budget than 7% and done.
We will use the % compared to industry standards in the end, but you should think about this number future forward to make sure you’re going to reach your business goals with that number.
Your Budget is Determined by Strategy First
If you don’t have a marketing strategy in place, close this article and go work on that. Why? How you’re going to spend your marketing is completely influenced by your current business strategy.
A startup that is venture-backed is going to spend VERY differently than a bootstrap startup funded by the founder’s pocket money. As counter-intuitive as it sounds, you should start with your business goals for revenue first, and then figure out how to reach that with your marketing budgets.
Doing it this way also gives you a moment to validate your business goals - are they feasible? Or are you asking for the moon of your team when you haven’t even invented rocket fuel yet?
Got your strategy and goals in place? Alright, we're ready to go on to marketing budgets.
Part One: Do Your Forecasting
Overall sales/revenue growth forecasting should be your first stop. Excel makes forecasting easy, you can create a simplistic model in a matter of minutes to project out your sales if you continue on your current growth path - even adding/checking for seasonality isn’t more than pulling your data and running the formula.
If you aren’t forecasting in one way or another, you’re missing out on one of the biggest opportunities in data - looking forward. Most analysis is backward-looking, which is the nature of the beast BUT the analysis that will really get you more money in your pocket is taking historical data to make predictions, models, and forecasting.
Part Two: Layer on Business Goals
Mathematical forecasting will take your previous growth trajectory and just extend that out for a month - year, etc. Which is very helpful, but it doesn’t consider any major changes or investments you might make.
If you received funding or you’re planning on changing your product offerings drastically, you should project what that will get you. We’re not going to go far into how to do this, since we’re mostly talking about the budgets here, but if you need help you can always get in touch.
Decide on Profit First
Here is one of the first places that the 7-20% rule goes wrong. When deciding on your business strategy, you should be deciding whether you want to turn a profit with your company. And it’s a totally reasonable strategy to NOT turn a profit.
In fact, a bigger company we know intentionally operated all of their marketing at a -20% ROI because it fit their strategy - which was to grow their business to the point that they could no longer be ignored by a competitor (who ended up acquiring them, for a major profit for the company owners).
If you’re comfortable with losing money because you have funding or a longer-term strategy that can only be accomplished by growing beyond what would be possible with a company turning a profit - then that % of your revenue could be a LOT more than 20% (or you could be investing that extra money into other areas like product growth or team growth, depending on that step #1 which is strategy).
You might not have thought a lot about profit when talking about marketing before. We tend to operate our marketing in a bubble of return on investment based on revenue alone - sometimes when you look at your marketing you don’t even look at the spend (aka if you’re looking at standard reports in GA).
As Avinash Kaushik (one of the foremost leaders in marketing analytics) teaches, you should be looking at profit, because it completely shifts how successful you think certain channels are (when you start adding up agency fees, creatives, and more, how successful is your Facebook social really?). And marketing spend doesn’t live in a bubble. If you ignore how that impacts the whole dynamic of your business finances, you could find yourself with a business that is struggling or in the hole because you overspent.
So you’ll want to:
Set the total profit goals for the company (positive, negative, or break-even)
Make sure you know your cost of goods sold, so you solidly understand your profit margin (a drop-shipping company will have a tighter margin than a marketing agency)
Research the true costs of different advertising channels, in both time and dollar investment. Paid advertising is much more expensive than your spend and organic (SEO) is usually operated at a great profit BUT takes a very long time comparatively to grow
While there are also way more complex ways to calculate how much you want to spend on your marketing, here is a good way to think about it:
While there are also way more complex ways to calculate how much you want to spend on your marketing, here is a good way to think about it:
[Projected/goal revenue] - [Goal profit - [operating costs (COG (cost of goods sold) + whatever your finance team says you spend money on + required company savings and taxes + additional costs (once again, your finance team is essential here if you have one] = What you have left for your marketing
If you want, you can then sanity check that and see how much it comes out compared to the 7-20% rule. Going above 20% would be considered quite aggressive, but that entirely depends on your business type. It may be possible for an aggressive digital agency to reach the 20% or even more mark in their first years of operation because 90% of their costs are on salaries and tools, which ends up being much less than a company that has a physical product.
Aren’t Your Recommendations High?
If you have included all of the costs to develop your products, create savings and buffers for your employees, and all of the other costs associated with a business you probably won’t see this % go over 20%.
More traditional sources may slap a 1-3% marketing budget recommendation as a “standard”, but if you think about a business that has 6 million dollars in revenue, a 3% budget for marketing would be 1.8 million. That could be right for your business, but if your goal is to double that 6 million revenue, you’re 1.8 million isn’t going to get very far. That’s why checking your budget against your strategy is so damn important.
Now Calculate Per Channel, CPA, etc. To Sanity Check
You may see advice that has you doing this part first - calculate a % and then start distributing based on your ideal CPA (likely based on your profit).
Even if your ideal CPA for a lead through Google is $32, it doesn’t make sense to calculate your budgets on that amount if your actual CPA is $150.
This isn’t bad advice, but we can do better. For one, use your historical data from your previous marketing as much as possible. Even if your ideal CPA for a lead through Google is $32, it doesn’t make sense to calculate your budgets on that amount if your actual CPA is $150. All you will end up with is a frustrated paid agency or team, and you won’t hit your idealistic targets.
Once you have your CPAs set, know how much cost goes into that channel (hello agency fees), you can have a clear picture of how when it comes to your revenue goals. Once the year starts out, you will have an easy way to identify which channels are over-performing and will be able to adjust your budget in a more agile way.
If the organic performance jumps and you’re making a big profit on that channel because of investments last year, you will be able to see that per-channel picture that gives you confidence in increasing budgets for more content/resources/etc.
Consider the Balance - in the Marketing Force
One more thing you should consider when distributing the budgets to marketing departments and channels is that diversification is your friend.
If 90% of your sales are coming from one channel, you’re setting yourself up for panic in the future. It may pay off to adjust those distributions even if your other channels are less profitable. It happens all the time - Google changes its algorithm or Facebook changes its advertising policies. You want to make sure that if that happens it’s an inconvenience but it doesn’t paralyze your company.
You can look at this balance historically by looking at the total sales/traffic by channel and see those distributions, and also look at how you’re distributing spending for the next year.
Summing It All Up
The TLDR version of this guide is: you should calculate your marketing budgets based on profit, forecasting, and strategy, NOT just a % of your revenue. Having your budgets calculated this way sets you up for success and also shows that you’re organized for potential funding or bumps in budgets.
Budgeting like a bigger company gives you a stronger hold on your marketing - you know what your plans are and you know where you might be spending more than you had planned (hello expensive ads agency). Like we always say, data is powerful because it helps you make decisions that will make your business better.
If you'd like a sample marketing budget, take a look at our webinar on how to calculate marketing budgets:
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