Do you dread budgeting for 2017? Are you struggling to justify investing in a particular marketing channel? Ever feel like your marketing budget was pulled out of a hat?
Almost every marketer I’ve ever met either struggles with either an arbitrary marketing budget created by upper management or the challenge of creating a budget that balances growth goals with cost limitations.
As confusing and frustrating as it can be to put together a reasonable marketing budget (or create a compelling argument for reasonable changes to your assigned budget), your marketing budget for 2017 can be an incredibly empowering or limiting factor for your business.
Fortunately, building a marketing budget for 2017 doesn’t have to be something you dread. With the right approach, it can actually be fairly simple to put together a practical, easily justifiable budget that will allow you to reach your marketing and business goals next year.
Phase 1. Identify Your Revenue Goals
The whole point of marketing is to produce profitable revenue for your business. So, before you can start to put together your budget, you need to know how much revenue your marketing needs to produce.
Sounds simple enough.
Unfortunately, while everyone knows that the goal of marketing is drive revenue, most marketers and business owners tend to get lost in the sea of other metrics. In fact, according to a recent survey we conducted at Disruptive Advertising, just 41% of businesses take ROI into account when planning their marketing budgets.
By comparison, 80% of CEOs and around 60% of marketers factor conversion rates into their marketing budget calculations. And, as you can probably imagine, all of these mismatched priorities make it incredibly difficult to come up with an effective budget:
The good news is, if you can remember that the goal of your marketing budget is to create revenue and not clicks, conversions or any other marketing metric, creating a marketing budget is fairly simple.
So figure out what your marketing revenue goal is, write it down somewhere, and let’s move on to phase two.
Phase 2. Define Your Target Audience
Unfortunately, while 72% of marketers are familiar with the idea of buyer personas, just 30% use them effectively. In and of itself, that’s a problem for marketers, but things get even more complicated when you try to create a marketing budget for an audience that you don’t understand.
For example, say you are marketing for ACME Widgets, the world’s premier widget manufacturer. You know that your average customer has a lifetime value (LTV) of about $24,000 (widgets are a profitable business, after all…).
With this in mind, you might look at a marketing channel where each sale costs $50,000 and think, This is a waste of money! I’m not putting any budget into that channel next year.
On the surface, that seems like a very reasonable decision, but let’s throw ACME’s buyer personas into the mix. As it turns out, ACME has three very different buyer personas:
And guess what? Remember that unprofitable marketing channel you were about to shut down? Turns out that it’s your best source of “Infinity Izzie” sales.
All of a sudden, that marketing channel doesn’t seem so unprofitable, does it?
If you don’t understand your target audience and what your buyer personas are worth, it becomes very difficult to decide which marketing channels will help you achieve your business goals.
So, if you don’t have buyer personas, don’t know the lifetime value of your personas, or are uncertain about what percentage of your sales come from each persona, now’s the time to figure it out!
Phase 3. Clarify Your Acquisition Cost
Once you know who you’re targeting and what they’re worth, you need to figure out how much it costs to bring in a new customer from each persona.
The simplest way to do this is to simply take your total marketing spend and split it up by the number of sales it produced from each persona.
So, if ACME spent $400,000 and generated 90 “Classic Cindy” sales, nine “Pro Paul” sales and one “Infinity Izzie” sale, here’s how their acquisition cost would break down:
With this model, it looks like ACME loses money hand over fist on “Classic Cindys,” but more than makes up for it on “Infinity Izzies.”
However, this model assumes that “Classic Cindys,” “Pro Pauls,” and “Infinities Izzies” all come through the same campaigns and channels at the same frequency. If you think about it, that doesn’t make a ton of sense.
Is “Infinity Izzie”—an enterprise customer who will drop $1.59 million on widgets—likely to respond to the same ads as “Classic Cindy”? I highly doubt it.
Maybe most “Classic Cindy” sales come through cheap social media ads. “Pro Pauls” click on YouTube ads. “Infinity Izzies” come from very expensive paid search ads.
If that’s the case, here’s what ACME’s actual acquisition costs might look like:
Now, your marketing channels may not be quite this straightforward, but with a little effort, you should be able to connect your marketing dollars with the buyer persona sales they produce.
As you assess each marketing channel, don’t be surprised if you discover big opportunities for your business. Some channels look like they drive a lot of value, but when you look at the revenue they produce, they are a waste of money. On the other hand, sometimes a channel might look like a loss on the surface, but when you dig into your data, you uncover a gold mine!
Phase 4. Build Your Budget
All right, we made it! Now that we have the information we need to calculate your marketing budget, all we have to do is run the numbers.
Since this is kind of a pain to do by hand, I’ve created a free calculator on my site to help you out. But, if you like doing things the hard way, I’ll show you how to do that, too.
Multiply your revenue goal by the percentage of your revenue you want to come from each buyer persona. For example, if ACME’s revenue goal was $2,425,500, here’s how they might break down their buyer persona contributions:
- “Classic Cindy”: 6% ($157,500)
- “Pro Paul”: 27% ($648,000)
- “Infinity Izzie”: 67% ($1,590,000)
Divide your revenue goal for each buyer persona by the revenue-per-sale for that buyer persona. In ACME’s case, it would look like this:
- “Classic Cindy”: [$157,500 revenue] / [$1,750 revenue per customer] = 90 customers
- “Pro Paul”: [$648,000 revenue] / [$72,000 revenue per customer] = 9 customers
- “Infinity Izzie”: [$1,590,000 revenue] / [$1,590,000 revenue per customer] = 1 customer
Multiply the number of customers from each buyer persona by the acquisition cost for a customer from that buyer persona. Again, for ACME, this is how things might shake out:
- “Classic Cindy”: [90 customers] x [$1,000 per customer] = $90,000 of ad spend
- “Pro Paul”: [9 customers] x [$12,000 per customer] = $108,000 of ad spend
- “Infinity Izzie”: [1 customer] x [$286,200 per customer] = $202,000 of ad spend
Finally, sum up the ad spend from all of your personas and you have your ad budget! For example, given these numbers, ACME would have to spend $400,000 to produce $2,425,500 in new lifetime revenue.
Not too bad, right? Well, that’s true…as long as you get it right the first time. However, if you want to play around with things and try out different scenarios, lifetime values, customer ratios, target revenues, etc, having a calculator gets really handy.
Unfortunately (despite what some CEOs seem to believe), you can’t pick a marketing budget out of a hat. But, as stressful as building a well-designed marketing budget for 2017 can be, it is still one of the most important marketing activities you can do.
Fortunately, if you know your revenue goals and the lifetime value and acquisition cost of your buyer personas, putting together a solid budget is a fairly straightforward process.
What do you think of this approach? How do you build an effective marketing budget?