How to: Set your marketing budget (backwards)
Ian Lurie Jan 20 2016
What’s an ideal marketing budget?
ONE MILLION DOLLARS IN SMALL BILLS DROPPED ON MY DESK.
Reality trashes marketing budgets. It throws all manner of misery at us:
- No customer acquisition data
- Bad customer acquisition data
- Wishful thinking by clients, bosses and boards
When that happens, I like to work backwards, like this:
Find your financial goal
How much do you want to make this year? Keep it within the bounds of sanity. Some businesses can triple their revenue in a year. Some can’t. Your goal needs to make sense.
Take my future business, Capybara Kingdom. Right now, it makes zero. Zilch. Nada.
This year, I want to make enough to feed and care for my animals and myself, plus a little extra. To do that, I need $150,000 in top-line revenue.
That’s my goal: $150,000
Is that realistic? That’s a whole other blog post. Assume I’m not smoking a joint (now legal in Washington) and move on.
Figure out customer value
I’m selling tickets for $20. That’s easy: One customer is worth $20.
To hit my gross revenue goal, I need 7,500 customers.
Figure out your margin
My goal is $150,000 gross revenue. If I hit that goal, I’ll earn $15,000, or 10% profit. That’s my margin.
So, one customer brings me $20 gross revenue, or $2 in profit.
Figure out what you’re willing to spend
Now, how much of that margin would you be willing to spend to acquire that customer?
I know, this seems backwards. Usually you take the cost per acquisition out of the gross customer value and it lowers your margin.
But we lack a starting point, so we can’t include the CPA in our margin calculation. Instead, answer this question: How much margin are you willing to give up?
In my case: Half my margin. I’m willing to cut my margin from 10% to 5% and spend the other 5% on marketing.
That’s one dollar per customer. I want 7,500 customers, so my budget is $7,500.
Welcome to reality
You want hard data. Me, too. I always prefer to create a budget based on previous cost per acquisition. But let’s cut to the heart of things, shall we? It doesn’t matter what the data shows. This is what you’re willing to spend. And that’s OK. If you end up spending less, great. If you need more, well, you’ll have to re-examine your priorities.
That’s why you hire experts. Like me. For one million dollars. Still not buying it? Dammit.
Budgets only work if you want them to. Why not start with a number that reflects your plans?
Ian Lurie is CEO and founder of Portent Inc. He's recorded training for Lynda.com, writes regularly for the Portent Blog and has been published on AllThingsD, Forbes.com and TechCrunch. Ian speaks at conferences around the world, including SearchLove, MozCon, SIC and ad:Tech. Follow him on Twitter at portentint. He also just published a book about strategy for services businesses: One Trick Ponies Get Shot, available on Kindle. Read More