As the year begins to wind down, many marketing teams will start to shift their attention to budgeting for next year. At least they should. Many times budgeting falls to the bottom of the priority list. The reason for this could be a perceived lack of time, or a general sense of dread leaving marketers wondering if they’ve budgeted correctly or set themselves up for failure.

Why Marketing Budgets Are Important

At any given time, there are several high-priority projects on your team’s plate. While each project is a priority in the eyes of its stakeholders, a marketing budget helps establish a hierarchy for what will make the most significant impact on your business.

Beyond providing this high-level structure, there are three main reasons why your marketing budget is essential and deserves dedicated time:

  1. Use it or lose it budgeting. Many organizations’ gut-check’ future budgeting needs based on the use of the current or previous year’s budget. If you requested $5,000,000 in 2019, but only used $4,000,000, then chances are you won’t be approved for another $5,000,000 in 2020 as the budget would be better used somewhere else.
  2. Return on Investment modeling. If you’re being asked to show the return on your marketing investments, then you will need to document how much you’re spending on marketing as a whole. If your budget isn’t thorough or done correctly, your ROI metrics won’t stand up to even the slightest amount of scrutiny.
  3. Show the rationale behind your request. Beyond demonstrating your marketing ROI, you should be able to answer the question “why” at any point with ease. Imagine:

Q: You’re looking to bring on a new hire?

A: Yes, here’s the work they’ll be doing and why it’s important to hit our annual goals.

Q: I notice a large portion of the budget allocated to video. Do we need that?

A: Yes, we’ve seen video to be an effective medium that leads to sales. Additionally, we have two product launches next year. We will want to create demo videos for each as we’ve seen those achieve higher engagement for video than the written features and benefits lists on the site.

Your budget not only helps your planning, but it should build a case for what you’re doing, why you’re doing it, and what you expect to get from it.

Where to start?

It seems obvious that higher priority projects would receive more money than those that do not contribute that same amount of growth for your business, right?

So how do you know which projects are the right projects to drive growth?

The first step is to go beyond your own marketing department and work with key stakeholders in your organization. Leverage them to identify a list of marketing goals that contribute to your overall bottom line.

These could be traffic to your website, conversion rates, email subscribers, your share of voice, etc.

Once you’ve listed all of the factors, prioritize them from most important to least important.

“But they’re ALL important” – you, right now.

To prioritize this list, you will have to think objectively and logically about each item. For example, driving more traffic to your website is important. However, if your conversion rates are horrible, then any efforts to drive that traffic may be wasted. Therefore, conversion rate optimization should be higher on your list.

Now that you have a prioritized list of your goals and tactics, you’re ready to calculate your marketing budget.

How To Calculate Your Marketing Budget

There are four ways to approach building your marketing budget. Depending on your organization, the method you use may be determined for you. However, that doesn’t mean it’s necessarily the best method, so let’s dive into the differences:

  1. Top-Down

In this method (and we use that term loosely), someone at the executive level has already established how much money marketing will get this year. The amount is most likely a refresh of the previous year’s budget. That’s it. This approach is not a very insights-driven, nor does it provide the flexibility for real growth or planning. Sure makes for a short “how to create a marketing budget” article though.

  1. Percent Of Revenue

Percent of revenue is a common method for guesstimating a competitors budget, as annual revenue data is available for public companies. However, it again bases future results against past performance and most likely metrics that do not align.

Budget = total revenue × % allocated toward marketing

Typical rules of thumb suggest:

  • New businesses should allocate 12-20% of revenue toward marketing.
  • Companies that are older than five years should allocate 6-12% of revenue.
  • B2B companies should allocate 7-8% of revenue.
  • B2C companies should allocate 9% of revenue.

For example, let’s imagine you’re the CMO of a company that has a $10,000,000 revenue. Your marketing budget for next year is 10% of revenue or $1,000,000. You meet with the CEO, and he has ambitious plans to double the growth from existing customers and launch two new products.

Could you do this with $1,000,000? Maybe.

However, at some point, something has to give to fund your goals appropriately retroactively.

  1. Competition-Based

With this method, you’re looking at your main competitors’ marketing and trying to determine what it would cost you to mimic or surpass them. The downside here is obvious, but just in case:

YOU ARE NOT YOUR COMPETITOR.

Stating that doesn’t mean that you shouldn’t keep an eye on what your competitor is doing, but rather that what is right for them may not be right for you.

Additionally, they may not be right at all.

Now, brands may find some success with this method as you’re letting your competitor be the guinea pig. However, you will struggle to gain market share and will most likely do more harm to your brand than good.

  1. Goal-Driven

A goals-driven approach is what we recommend at Mighty Roar as it establishes realistic amounts based on what you’re trying to achieve. Additionally, it allows your budget to speak the same language as your business.

The framework that we use is Objectives, Goals, Strategies, and Initiatives.

We often tell clients that the top objectives should be the same high-level metrics that your CEO would report to their board of directors.

From there, everything should ladder down and align.

 

Monthly marketing budget = (marketing goal acquisition cost × marketing goal #) + marketing operating costs

This structure not only helps in budget planning but also in project alignment throughout the year. If a new idea or project doesn’t align with a measurable goal, then it may not be worth doing.

In preparing for battle I have always found that plans are useless, but planning is indispensable. – Dwight D. Eisenhower

Developing your marketing budget doesn’t have to be hard, in fact, if approached correctly and, with the right partner, your marketing budget can motivate your team, elevate the level of strategic conversation within your organization, and increase your odds of marketing success.