How To Create a Marketing Budget (5 Methods)
I’m guessing you’re here because you’re trying to figure out how to create a marketing budget, and are a little frustrated because the other blog posts you’ve seen about marketing budgets aren’t useful.
I know your pain. That’s why I wrote this post.
After talking to lots of other marketers about budgets, and having been through quite a few budgeting planning exercises myself, I’ve realized why it’s all the other blog posts aren’t useful:
It turns out, there isn’t just one way to create a marketing budget!
There are several methods and which one you use depends on your situation. Let’s get into it.
How To Create a Marketing Budget
I’ve found that there are 5 ways to draw up a budget for marketing.
None of them are superior to the other, which is “best” or appropriate for you totally depends on your team’s situation.
1. Working backward from your goals
The first method views marketing as an input to some outcome, and therefore the budget should be designed to achieve that outcome.
“We want to grow our signups by 300% YoY. We expect average CPA to $X, which means our budget needs to be $Y”
You start with the goal, then take steps backwards until you have something that you can measure in terms of dollars. You’d take your target average CPA figure and break it down per channel, which would help you break your budget down even further, down to how much you’d spend on Facebook ads or content creation.
We have a huge product launch this quarter. It’s important to get maximum PR coverage: we have a goal of 10M media impressions. To do this we’ll need to hire a PR company ($X), throw a launch event ($Y), and run some billboards ($Z) therefore our budget needs to be …”
If you have the luxury of having deep enough pockets, or if you’re in a super competitive market, this is probably how you’ll end up doing it. That’s because growth is the primary objective, and fiscal discipline second.
2. Setting constraints in relation to revenue
In this method, you’re anchoring your total marketing spend to topline revenue.
The underlying logic here is that all spend should be benchmarked against this number: from sales expenses, to engineering, to marketing. Everything is cost of revenue. Thinking this way is useful from a planning and forecasting perspective, which is why you see this method employed in larger companies or public companies.
Furthermore, how much you spend on each team is a reflection of the company’s priorities. Is your competitive edge in product innovation? Then in theory, the % you spend on your engineering team should be higher than what you spend on marketing.
So for example:
Based on this period’s company priorities, we’re going to set marketing expenses as 20% of our annual revenue forecast, which means we have $X.
This would give you a “topline” marketing number.
For most teams, you’d then further break that down into channel spend, which would be constrained against the total marketing budget (e.g. SEM is 20% of budget, software is 10%, etc). This way, everything is a % of some bigger number.
3. Anchor your budget to LTV
In this method, your north star is the health of your LTV:CAC ratio.
The logic goes that if I’m spending $1 to acquire a customer that is worth $10 lifetime (and I get that $10 within a reasonable timeframe) then in theory I should just plow as much money into acquisition as my company can handle.
This is important — this means that technically you don’t have an upside limit to your budget. If the LTV:CAC makes sense, keep going until it doesn’t.
I’ve seen a lot of ecommerce and mobile app marketers do this, because these verticals typically have a high velocity of transactions, which gives you a shorter feedback loop on your LTV:CAC assumptions.
This happens in other industries as well — especially SaaS — the requirement is just that you are confident in your LTV reporting, and are watching other metrics as a hedge.
We want to keep our LTV:CAC ratio 3:1. Therefore, as long as our LTV hovers $30,000, we are okay with a CAC of $10,000. We will check on this number on some set frequency (monthly, quarterly) to sanity check and re-calibrate as needed. Between those periods, our marketing spend will simply be constrained by our judgment and what we think is reasonable.
This is suitable when you can make reversible changes in your marketing strategy fairly easily (i.e. you aren’t committing to superbowl ads). Most importantly, you need to be confident in your analytics stack. Otherwise this can get ugly real fast.
Related: How to build a go-to-market strategy
4. Set an arbitrary ceiling for your budget
Another school of thought — the marketing budget planning process is an unnecessary exercise!
The reasoning here is that the admin headache of maintaining and reporting on one is not worth it. Yes we should set some limit, because we recognize that we don’t have unlimited funds, but let’s not get caught up analyzing whether content production should get $X and that SEM should get $Y.
The thinking further goes that today’s buyer’s journeys are a multi-device, multi-channel affair, which means that the effect of marketing activity X is inherently hard to measure. Time will be wasted by trying to attribute things, and we will end up with a lot of false precision.
A marketer who thinks in this way might say something like:
We recognize that setting a cap on marketing is important for planning / cash flow reasons, and so we will just say that we’re not going to think about our budget until we spend over $XX, we’ll consider that number a tripwire where we evaluate whether it’s worth it
5. Don’t bother with a budget
An extension of the last school of thought. Marketers who use this “budgeting” method like it because it lets them be more nimble when seizing opportunities.
It sounds heretical to avoid setting even some topline number, but in some cases operating this way could make sense.
Maybe your company is so well-capitalized that money is not a practical constraint for customer acquisition.
Imagine being a marketer at an early stage, funded, fast-growing startup. You role is probably some hybrid of product marketer / business development / marketing. A potential high-impact partnership comes on your radar but it will require $X to execute. If you had set a fixed marketing budget, you’d have to say no / need to justify to other teams why you’re going to break your budget. But since there isn’t really a budget, you are more free to explore it.
This is the equivalent of being a teenager and asking your parents for money every time you want to go out. The money is there, you just have to ask for it.
There’s no one way to create a budget
There’s universal “correct” way to make a budget, and as you go through your career as marketer you’ll probably end up using some version of all 5 methods.
The most important point is to realize that there is no “best” way, only the one that is the most appropriate given your situation.
I’m sure there are other methods I haven’t tried yet: if there’s something I’ve missed here, please let me know in the comments.