Typically, businesses will set their marketing budget for the upcoming financial year between January and March – this allows enough time to gather data, formulate goals, and set a budget, before the new fiscal year in April. Of course, this assumes an April start and some businesses will have other financial year ends so preparing for the start of the new fiscal year ahead of time is always a good idea. Our financial year end is weirdly the end of August. 😉
But how do you set your marketing budget? I see many businesses struggling with this important financial consideration, and many people simply “wing it” and spend on marketing as and when they need to. While this can work, I believe it’s prudent to give your marketing budget proper consideration and calculate it using sound financial and customer information.
Below, I explore how to calculate your marketing budget, why it’s important, and the factors you should consider.
Why Setting a Marketing Budget is Important
So, why do you need a marketing budget? Surely you can just try a few different things like PPC, SEO, and local marketing and everything will work out fine? No. If you want your business to be profitable, run smoothly with a regular flow of leads and sales, and have financial stability, setting budgets is imperative – not just for marketing, but for every other function, department, or task.
Setting a marketing budget has significant benefits including:
- Reduced financial risk.
- Reduced chance of overspending.
- Helps you to achieve your business goals.
- Allows you to grow your business in a planned and consistent way.
- Allows your marketing team to prepare effectively based on the overall business objectives.
Perhaps, the most important benefits are reducing your financial risk and the chance of overspending. What happens if you spend thousands on your marketing only to realise you have left your business short for paying suppliers like utilities or perhaps the tax man!? This might seem incredibly basic, but it happens! I’ve always focused on making a return on any marketing investment, but you can only do this if you clearly track what is happening, what marketing activity is working and what isn’t so you can adjust and improve the return on investment.
A marketing budget gives you structure, a clear financial framework, and allows your marketing team to operate effectively as they can then look to use their budget and use it in the most cost-effective way possible. A marketing budget will also help you grow your business and keep new customers flowing in, if that’s what you need. It’ll enable you to look at your marketing and work out which activities generate quality leads at a reasonable cost per customer acquisition.
Marketing = Creativity + Maths. It is that simple. As marketers we need to be financially and commercially aware as well as having the creativity to make our marketing campaigns resonate with our target audience to generate quality enquiries that lead to new, profitable business.
Factors to Consider When Calculating Your Marketing Budget
While you can use analytics and customer data to calculate your marketing budget, there are also important factors to consider that could mean you want to spend more, or less, on your marketing budget.
How much revenue and profit are you generating?
Both actual and estimated revenue and profit are the most important factors to consider when deciding your marketing budget. If you don’t have a clear idea of your current cash flow, or your expected revenue accumulation during the next financial period, you can’t allocate a realistic marketing budget.
What are your overall business expenses?
With your revenue and profit determined, you also need a clear picture of your overall expenses. This should include everything and be as detailed as possible. Only with a full picture of your overall expenses, and what each area of your business needs can you then set a realistic marketing budget.
For example, perhaps in the upcoming year you’ve got to account for increased employment costs or the rise in national insurance for business which may mean you can’t afford the same marketing budget as the previous fiscal year. You have to make sure you have the cash in the business to pay for your marketing but also for all your other business expenses.
How important is marketing to your business?
Not all businesses need to devote the same percentage of their finances to marketing. There are factors that will affect how important marketing is for your business including your industry, business type, competition, existing customer base, and how you generate your revenue and profit.
For example, a local accounting firm that has an established list of 15 clients would most likely consider market less important than an eCommerce store that needs to push volume as opposed to value. Think about the importance of marketing, and the actual impact it has on your business, and align your budget creation accordingly. That being said, I believe marketing is important for all businesses. And the cost per acquisition target you set will vary based on the lifetime value of a customer; the higher the lifetime value, the higher the cost per acquisition is likely to be.
What stage is your business in?
Where your business is in its lifecycle is incredibly important in calculating your marketing budget. For example, if you are a relatively new business that is still establishing itself and growing its customers base, you may need a larger initial marketing budget. However, you’ll need to be careful with regard to how you spend your budget to ensure you are generating leads and sales at the right cost per sale or cost per acquisition. The blog I wrote a while ago could be useful if you are a start-up business or have limited budgets: 5 Top Tips for Marketing Your Business on a Shoestring Budget.
Alternatively, perhaps you are a more established business that has been around for years and has a good reputation. In this scenario, marketing and new customer acquisition may not be as important and instead you may want to divert more budget to customer service or customer retention. That being said, as an established business, you can truly grow fast as you already have a reputation and acquiring customers should be easier. Your conversion rate from lead to customer should be better than when you first started your business.
In reality, I believe it is not so much the stage you are at as a business and is more about your business ambitions and whether you really want to grow your business.
Calculating Your Business Marketing Budget – A 6 Step Process
When it comes to calculating the marketing budget for your business, the above factors are especially important and will alter your marketing budget allocation. However, we can also use those factors and a specific 6-step process to calculate your marketing budget. This works best when your goal is to generate new customers.
1. Gather marketing data and look at previous campaigns
Any marketing budget must be based on historical data. This includes customer insights such as buying habits and demographics, but also the performance of your previous marketing campaigns.
Make sure your customer research is up-to-date and that you have information to refer to when setting your budget. Ideally, you should also already have audits/reviews of your previous marketing strategies handy so that you can see which worked the best and which you want to focus your efforts on for this new budget period.
2. Set marketing goals
With marketing data and previous campaign analytics sorted, as well as access to the business plan and business targets, you should be able to clearly define your marketing goals. Formulating your goals must include any relevant stakeholders in your business – if you’re the Marketing Manager, you should be working with the owner / MD to finalise the marketing objectives and budget required to achieve the marketing goals and therefore business objectives.
Knowing your marketing goal will then allow you to set an appropriate marketing budget that will achieve it. For example, if your goal is to gain 500 new customers in the next budget period, your budget would be the value needed to achieve that. But how do you know what that value needs to be? Let’s find out…
3. Find your average CPL (Cost Per Lead)
If your aim is to generate new customers, you first need to establish your Cost Per Lead – how much on average does it cost your business to get one new lead. This is the first step, and it can be calculated using the simple formula:
Amount spent on lead generation / number of leads generated
For example, if you spent £1,500 on lead generation last month, and this generated 200 new leads, your CPL would be £1,500/200 = £7.50. While this figure is important for your marketing budget, it’s also useful for performance monitoring.
This is because in an ideal world, your CPL should always be decreasing, i.e. it’s costing you less and less to generate new leads. Of course, this may not always be possible as new competitors enter your sector, or larger competitors spend even more money acquiring customers.
It is also important to understand the cost per lead for each type of marketing activity. For example, what is your cost per lead for Google Ads compared to a particular Exhibition or even SEO. By understanding the cost per lead at this level you can adjust the marketing mix to ensure that you generate the leads at the right cost per lead overall.
4. Find your average conversion rate
The next step is to find your average conversion rate as lead generation doesn’t give us the entire picture. A lead could be someone who simply visited your website and viewed a product page – they would only count as a conversion or sale if they made a purchase if your website is an ecommerce website for example.
For business-to-business companies, a lead can also be classified as an enquiry from your website or a phone call into your business where the contact is interested in obtaining a quote or proposal from you.
This is the more important metric as ultimately; conversions mean revenue and profit for your business – leads don’t always necessarily result in those things. Calculating your average conversion rate can be done using the following formula:
(Total sales / Total leads) x 100
For example, of those 200 leads you got from the CPL calculation, let’s say that resulted in 45 sales. This would give you a conversion rate of (45/200) x 100 = 22.50%.
Again, to truly identify which marketing activities deliver the best results, you would ideally complete this by marketing channel or even activity. We often find that the conversion rate from lead to sale is higher for Google Ads than for other enquiries from a website that may have come in from your natural listing on Google. Interestingly, we’ve also found conversion rates to be better with Microsoft Advertising compared to Google Ads. 🤔
5. Find how many leads you need
You can now use your original marketing goal – to gain 500 new customers, to find out how many leads you will need to achieve it. This can be done using the following formula:
New customer goal / average conversion rate
This would mean that you would need 500/0.225 = 2,222 leads needed to achieve that new customer goal.
Again, you could complete the above calculation by marketing activity to have a better idea of where you need to allocate your budget and time.
6. Calculate the final budget allocation
And this brings us to the last step. Now that you know how many leads you need to generate to get 500 new customers, and your target cost per lead, you can calculate your required marketing budget by using the following formula:
CPL x Leads needed
In this example scenario, you need 2,222 leads to generate 500 new converted customers. You also know that it costs you £7.50 to generate each new lead which means your marketing budget should be 2,222 x £7.50 = £16,665.
As you can see, this process requires multiple steps, but if your aim is to get more converted customers, it allows you to set a fairly accurate marketing budget.
The key is having the relevant data including your marketing spend, and all the relevant prospect journey and customer data to hand. You might want to use other marketing goals and not just new customers acquired, and if so, you can use the principles of this approach to calculate your marketing budget, but you might need to use different metrics. If you need further advice on this, you can also contact us to book a strategy session.
Make Sure Your Marketing Budget is Realistic, But Allows Room for Growth
Setting your marketing budget for the next financial year is imperative. If you don’t set a budget, marketing costs could spiral out of control and you could get diminished returns, or simply waste money.
Alternatively, you may have real growth aspirations, but you haven’t done the above calculations and as a result you may not actually be spending enough on your marketing to generate the new customers you want and need to achieve your overall business objectives. If you don’t invest in marketing and lead generation, you won’t grow your business efficiently or effectively. Ideally you need a steady stream of quality leads coming into your business that lead to new customers are a regular basis. To do this you will need to invest in marketing as a business can only grow so far with referrals for example.
A strict marketing budget using figures such as CPL and conversion rates allows you to be realistic, while also achieving your marketing and business goals and enables you to then grow your business profitably. If you need any marketing advice, please feel free to contact us and we can assist!
