Deciding how much to allocate to marketing can be an arduous task for startups. Established companies benefit from extensive knowledge about customer lifetime value, customer acquisition costs, and desired market share. They can input this data into a spreadsheet, which then generates a well-informed marketing budget for the upcoming year.
However, startups often lack access to such data, leaving them to rely on guesswork when determining their marketing expenditure. Overspending could deplete valuable capital that could otherwise be invested in product development. Conversely, underspending may hinder rapid growth, profitability, and the ability to showcase the necessary growth for future funding.
What is a marketing budget?
Let’s begin by clarifying the concept of a marketing budget. The term “marketing” encompasses various functions, such as pricing, promotions, digital asset creation, and website development.
We recommend including all costs associated with promoting your business, excluding direct sales, in your marketing budget. This encompasses expenses for website creation, SEO, social media, agency or freelancer retainers, staffing, media spend, creative production, public relations, and customer relationship management (CRM).
Marketing Budget as a Percentage of Revenue
Some business resources suggest that young companies (up to 5 years old) allocate 20-25% of their budget to marketing. For more established companies, the recommendation ranges from 10-15%, depending on strategic objectives. However, other sources propose different percentages. For instance, the US Small Business Administration suggests spending 7-5% of revenue on marketing for total revenue less than $5 million.
The disparity is substantial. How do you determine the appropriate percentage for your situation?
What if you’re pre-revenue? In such cases, you can apply your chosen percentage to the projected revenue outlined in your business plan. However, exercise caution as projected revenue is based on assumptions, potentially resulting in a marketing budget that significantly deviates from real-world requirements.
Moreover, what if you have ambitious growth targets to achieve or your competitors spend significantly more or less than the recommended percentages? The one-size-fits-all approach loses its efficacy under these circumstances.
Test and Learn
We recommend a “test and learn” approach for clients facing uncertainty in budget allocation. Select one or two channels and allocate a modest testing budget for experimentation. This budget should be small enough that its failure wouldn’t be detrimental, yet sufficient to gather substantial data for analysis. While the optimal amount varies by industry, a reasonable starting point could be around £1.5-2k per channel per month.
Running tests for three months will provide valuable insights into customer value and acquisition costs. Proper execution of these tests is crucial to avoid misleading outcomes. Consequently, it’s advisable to collaborate with specialist consultants rather than relying on generalist marketers.
Once these tests are complete, you should have a better understanding of:
– Your average customer acquisition cost (CAC), even if it’s not an exact average. This information will provide insight into achievable CAC.
– Your average customer lifetime value (LTV), which represents the total profit a customer generates over their lifetime. Through initial tests, you’ll gain a better understanding of customer behavior, order value, and can estimate LTV.
Armed with these two pieces of information, you can move beyond guesswork and calculate an informed marketing budget.
How to Calculate Your Marketing Budget
Fortunately, we have developed a marketing budget calculator designed precisely for this purpose.
Using your LTV, CAC, and revenue targets, you can determine your ideal marketing budget. We have detailed instructions on how to calculate your marketing budget, which you can find here. In general, follow these steps:
1. Calculate your projected LTV:CAC ratio.
2. Define your growth targets. For example, you might aim to acquire 50 customers within 24 months.
3. Calculate your CAC budget, which represents the amount you need to spend to acquire your target number of customers.
4. Calculate your loaded marketing budget, incorporating channel spend and additional marketing costs such as salaries. As a rule of thumb, doubling your CAC budget can provide an estimate for your loaded marketing budget.
5. Calculate your monthly marketing budget by dividing your loaded marketing budget by your desired timeframe, e.g., 24 months in the example above.
How to Maximize Your Marketing Budget
Now, let’s address the critical question of optimizing your marketing budget. To make your budget effective, you’ll need:
1. A solid, well-researched strategy that identifies your target audience, the channels you’ll utilize, and your unique value proposition.
2. A well-balanced channel mix, selecting marketing channels that resonate with your customers without stretching your resources too thin.
3. A systematic approach to experimentation, treating marketing tests with scientific rigor and analyzing the results.
4. A capable team consisting of expert marketers and channel specialists who can make the most of the allocated budget.
By incorporating these elements, you’ll be well-positioned to maximize the impact of your marketing budget.
Remember, allocating the right amount to marketing can be challenging, especially for startups. However, by adopting a test and learn approach, utilizing available data, and implementing effective strategies, you can make informed decisions that drive growth and success for your business.