When your business is in its formative years, it can be hard to figure out exactly what kind of marketing you need.
How much of your hard-earned revenue should you reinvest into marketing? Too little, and it may not have any impact. Too much, and you could go broke!
Entrepreneurs often need to use iteration to figure out what works for their specific business.
For instance, solopreneur Kyle Taylor figured out he needed to reinvest roughly half his revenue into marketing his blog. One year into business, ‘The Penny Hoarder’ blog was bringing in $55,000 through affiliate ads and sponsorships. To increase website traffic, Kyle reinvested $20,000 towards website design. That year, the blog made $111,000. Once again, Kyle reinvested half the money to increase traffic through advertising and design. Once again, it paid off, with $216,000 brought in. The next reinvestment went towards hiring freelancers for marketing and infrastructure. A few years down the line, with $10 million in revenue, Kyle still says, “You can bet I’m reinvesting half!”
And yet, there’s no one size fits all.
On one hand, you’ll find writer-solopreneurs such as Sahil Bloom making $70,000 a year from a newsletter and pouring it all back into growing it. On the other, a similar creator such as E.L. James will be making $1 million a week for having created a book that went viral without any marketing whatsoever.
Market research suggests that small businesses should set aside 2-5% of their revenue for marketing for a B2B business, and up to 10% for a B2C one.
But what if you want to grow faster than the businesses around you?
Conversely, what if you’re having a tough year and want to conserve funds?
How do you calculate the ‘sweet spot’ budget that’s exactly relevant and right for your business?
Businesses aren’t built in a vacuum, and we can’t establish marketing budgets without understanding the lay of the land. Ask yourself:
Why do you need to market your business and set a budget in the first place? Some do it for better leads, some for brand awareness, some to attract subscribers…
What’s your marketing goal?
Disclaimer: This is going to be harder than it seems!
Some marketing expenses will be evident and easy to estimate. For instance:
Other expenses may slip your mind (but are very much there).
Add it all up!
Depending on your business, some channels just won’t make sense (Lamborghini doesn’t advertise on TV).
Now that you have all your marketing channels bulleted, put the ROI (Return on Investment) against each one. It’ll be easier to see what’s not working.
Where is your customer first hearing about your brand? If it’s on Instagram, perhaps that’s where you should invest more. What exactly is making them click on “BUY”? If it’s a new copy you’re using, then that’s what you need more of.
You want to prioritize the channels that are giving you the maximum ROI. And you want to keep optimizing what you do on them.
It helps to know what others in your industry are doing. Broadly speaking, manufacturing and construction companies will invest 2-3% of their revenue towards marketing, consumer service companies will invest ~19%, and retail, media, and education will be somewhere in between.
If you’re a brand-new startup in dire need of visibility, it might make sense to burn more marketing money. If you’re already a stable business, it might be wiser to increase your profitability.
VC-backed startups are advised to budget as much as 30%-50% of funds raised for marketing. And companies with decades of experience can do with as little as 2-10%, just to retain their positioning.
Consider two simple metrics:
LTV should be much higher than CAC, right?
Say each customer throughout their association with your company will make you $600. And say you spent $200 to acquire each one. That gives you an LTV:CAC ratio of 3:1 – which is considered good.
If your ratio is way off, you need to shuffle things around.
Establishing a marketing budget as a percentage of revenue is a frequently used method. It works because it quickly puts things in perspective.
You probably thought the Barbie movie marketing budget ($150 million) was unbelievable! But it worked out to a little over 10% of what Warner Bros. made on the movie ($1.446 billion).
You might think it’s ridiculous that New York University will spend $28 million a year to attract students, but that’s less than 1% of the $3.957 billion revenue it made that year.
Other methods to calculate a marketing budget include benchmarking to competitor budgets, or just setting a realistic number your business can afford.
Breaking down your total spending into categories will give you a marketing budget template you can easily monitor.
For instance, you may choose to allocate 30% of your budget for content marketing, 30% for paid ads, 10% for rebranding, 10% for events, 10% for analytics software, 10% to pay freelancers… It’s really up to you.
Your marketing budget should ideally evolve by business stage, consumer seasons, and channel efficiencies, but none of that will be possible without analytics.
Your last step (and you’re done!) is to establish a system of regularly tracking your returns. You can’t improve what you don’t measure.
To many entrepreneurs, creating a marketing budget initially seems like a daunting task. Over time though, it starts to feel more like a fun science than a tortuous art.
Close to one-third of all startups fail because they run out of money; choose your expenses wisely, and this won’t be you.
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