How to decide your Marketing budget


Recently I gave two talks at Driftrock's & Distilled popup shop on how to create the first adwords search campaign. Both the times I gave the workshop there was a common question around what is an acceptable budget/starting point for a PPC campaign and what is a good enough test.

Well as you might imagine there isn't ONE single answer for this. It is almost as ambiguous as asking what is the best place to live or what is the best job? it depends on a number of factors that are common to everyone, and some that are specific to each individual, country, culture, ...

Depending on what you want to achieve, where you want to do it, when you want to do it, the money that you have, man power, time that you have available, vertical that you are exploring, type of business, etc.. etc.. you will have different ways of budgeting your spend.

That being said.. here are some of the most common budget types you see for big companies and startups to choose from.

Budget methodologies:

"If your goal is to grow as fast as possible"

Objective driven

  • To generate X amount of sales we need Y percent levels of awareness, which requires Z impressions/clicks that cost P.
    • To generate 15 sales per day, we need to have 3 times more awareness, which requires 3 times more clicks = 300 clicks day. The average CPC for these keywords/ads is £0.30 so we will need £90 a budget of day.

Pay back

  • This method is basically defines how fast can you grow.
    • Imagine you spend £1000/month in a "marketing campaign" and that the profit you get per sale is £10/month.
    • If your campaign grants you 33 sales per month you'll need 3 months for a user to become profitable.
    • This means that you will need aprox 3*£1000 cash buffer per campaign to cover for the conversion delay. If you want to grow faster you will need a bigger buffer (assuming everything else remains the same).

Time (deadline)

  • Top down in some cases where the budget figures have already been dictated and need to be achieved.

    • Assuming current objectives(scope)/growth/acquisition(quality/cost) metrics remain the same how much do I need to budget.

    Example:

    Current number of sales=10 Sales objective=100 Number of months left to deadline=3 Current av. number of sales per month=20 Runrate do deadline 3*20=60 sales expected

    Total sales expected =60+10=70 sales (missing 30 sales!)

    Lets fix that:

    100-10=3*(New Actual Sales per month) New Sales per month=90/3=30 Current sales per month=20 Delta(%)=30-20/30 (We need 33% increase in sales)

    Assuming 1 person does 10 sales a month and costs £1000. The budget will be Previous Budget+£1000*3. If you can't predict using your current channels this maybe this isn't the time to use this budget methodology.

    You can also modify this example for the case you have 0 sales to come up with a start budget.

"If you goal is to get as much as possible from a fixed budget"

Affordability (Good starting point for bootstrappers)

  • Do quote research on different channels (keyword research, affiliate negotiation, etc..). Understand what kind of figures you should expect from your budget.
    • We have £1000 per month to spend, how much can we get from that? How can we get more? We did keyword research and we saw that the average cpc for this industry and the right keywords is £0.35, with £1000/£0.35 = 2857 clicks. With a 2% conversion rate (standard e-commerce conversion rates vary between 1-3% depending on vertical/price) this means will mean round 57 conversions.

Modeling

  • Mix between affordability and objectives. This methodology is based on your financial model and growth expectations.

    `Affordable CPA/CPL * Objective = Budget`    
    

Percentage of sales

  • Defining a marketing budget from a percentage of sales revenue might be one of the simplest ways of defining a budget. This is not the most amazing method if you don't have any sales yet.
    • Although the number might vary the rule of thumb is B2B 0.5-2% / B2C 5%-20%.

"If you want to beat the competition"

Competition

  • Pretty self-explanatory, try to understand how much is the competition is currently spending and use an affordability method to then get more granular.
    • In paid-search you can use estimates based on keyword research and tools like SpyFU, Compete and SEMrush

"If your goal is to grow as profitably as possible"

  • Profit optimisation (Good starting point for bootstrappers with the following examples)

    • In case you have a business that you have enough data to understand how much your customer is worth (LTV) and what margin you want to have (ex: subscription models, arbitrage models, product/service retailers with very spread recurrence).

      • In this case you will budget based on getting the highest profit margins, i.e looking to increase budget for the campaigns with highest ROI or ROAS (Returns on investment) and decrease budget or improve the ones with lower ones.

        Simple LTV eq=(revenue or profit )* lifetime * recurrence/time

        Simple ROI eq= Revenue-Costs/Costs

        Simple ROI eq= Revenue-Costs/Cost of Ads

You might also want to read:

  1. Different ways to calculate LTV
  2. Improving Profit with Google ROI optimisation
  3. CAC Ratio