The Right Way to Build Your Marketing Budget
I’m here to talk about why I think using percent of revenue as a way to establish your marketing budget is sort of intellectually lazy. I would compare that to saying how much should I save personally? That’s a very broad question, but what’s the context?
Are you looking to retire at a certain time or are you looking to purchase something? How much money do you make? There’s so much context missing.
I think that’s a route to set yourself up for establishing the wrong budget. I will say it’s probably come up. You’ve probably heard from a partner or from someone on your internal team.
“Hey, our industry standard is that we spend 5% of overall revenue on marketing.”
That’s probably in your head. I still think there’s a better way to get to that, but it might be a helpful benchmark just to use as an input when you are establishing your budget.
Okay. So what’s the alternative? How can you establish the amount you’re spending on marketing in a way that accounts for more context and more of the business situation you’re in?
So I like to think through four different stages here.
Step one is what is the business objective that marketing needs to support? Step two, what’s the hypothesis that you have for how marketing is going to help you hit that objective? Three is — and this is pretty complex — but for today, what is your starting point? Are you early on in your journey or are you further toward the end of the spectrum of sophisticated marketing? And then the last one is how fast do you need to go to get to the objective you’re looking for?
So to get into the first step, what is the high-level business objective that marketing needs support? Some examples might be, I’m talking high-level business objective, do you need to grow by 100% over the next three years? Do you have aggressive growth plans? Do you need to establish a new position and market share in your particular category? Do you need to enter into a new market that you haven’t currently entered into?
So I’m talking high-level like those examples.
So to build on those objectives, what’s your hypothesis for how marketing needs to help you impact those plans? What’s marketing’s role in that? And I think it’s important that you have an opinion on this or you seek help to get an opinion on this because marketing will have a role in that some way or another.
So an example might be you need to establish a brand that helps you win in the marketplace and earn preference over your competitors, and say you’re not there yet, and that’s your hypothesis. If you do that, you believe you can hit certain growth targets.
Or maybe you’re more of a sales-led organization and you need marketing to help you build an incredible demand generation machine, and that will help you hit the certain targets that you’ve set out.
So what’s your hypothesis for what marketing needs to do for you?
So in the next step, I’m oversimplifying this, but I think a helpful tool to use is a spectrum of maturity. Where are you right now, taking into account what are your business objectives, what’s your hypothesis and what’s your starting point?
So say the spectrum looks like foundational activities all the way to more sophisticated, innovative activities. So on the foundational side, are you at a place where you really just need to get your website to a place where you’re competitive in the marketplace, or you need to start generating content that speaks to your target audience?
Or are you even running any sort of campaigns? Do you have presence at events or trade shows in the market you’re competing in? Those are early stage foundational things that you really might need to assess am I there yet? Am I in this arena and do I need to move further on the end of the spectrum to say innovation or sophisticated?
And that looks like you have advanced integrated technology that produces data that is insightful to you, helps you make decisions. You’re at a place where you can actually run campaigns and get data back that says this campaign is performing better than another, according to my hypothesis.
Or you’re in a place where your brand is so established that you know that you have preference in the marketplace and you’re winning with your customers.
So where are you on that spectrum?
And take a second to pinpoint yourself or get help to assess your current sophistication so that you know, your business objective says X, your hypothesis says Y, and where am I today?
So to eventually tie this back to what should I be spending on marketing and what is my percentage of overall revenue? This is where, after you take into account what you need to achieve, what’s your hypothesis and where are you today, and you know where you need to be, that is the plan.
That is the plan that you have and what you need to knock out in order to get to where you need to be.
How fast can you go?
That’s the last question. What’s the speed? And you should know by then how much money is it going to take to get me to the place where I want to go, where my plan is complete, and say, you’re a $50 million company and your plan says you need to spend $3 million, and you could do that over six years. You could do that over three years. If you do that over six, say it’s $500,000 a year. That’s 1% of spend.
If you need to do that over three years, that’s 2%.
So your approach to how much you’re spending on marketing is more methodical and you’re ending up with a bottom-up plan to how much is the percentage of overall revenue. And I believe that’s a much better approach than looking at how much does the industry say I should spend and am I there or not?
That doesn’t account for the context you need in your current situation to establish the budget that you need.
So next time you’re told this is the percentage that the industry is spending in relation to revenue, maybe think twice about the advice you’re given.
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