How to: Set your marketing budget (backwards)

Ian Lurie Jan 20 2016

Pablo 3

What’s an ideal marketing budget?

ONE MILLION DOLLARS IN SMALL BILLS DROPPED ON MY DESK.

Or not.

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?

5 Comments

  1. Mark Preston

    Mark Preston

    This reminds me of a meeting I had with a prospect where their expectations far exceeded what was realistic. To demonstrate, I got my pen and pad out and started to work everything out backwards, just like you have explained above.

    Once they saw that their goals was totally unrealistic due to the very tiny profit margin their company worked on together with the size of the market, they gasped.

    Now, I was not talking to a startup here. This was an established business that just failed to work their marketing budget out backwards – as we all should do. If I had of taken the marketing budget that they had originally set aside, it would have always doomed to fail.

    It surprises me just how many companies I speak to that just pluck a figure out of the air and hope for the best. After all, working the budget out backwards is such a simple thing.

    • I hear ya.

      I personally run into the same problem when I’m budgeting for non-marketing stuff. If I lack experience in a particular job/task/discipline, it’s really, really hard to figure out what you should spend. I’ve tried to be more mindful of that when budgeting with clients.

  2. “Wishful thinking by clients, bosses and boards”. Oh man, is this right or what? I just recently had a similar situation. As if I can predict how many comments or shares will an article get (especially having in mind that I used brand new technique to create it). Nice article Ian, way to go with capybara, they are the cutest!

  3. Alex

    Alex

    This is surprisingly simple, but has it gained any traction from potential clients?

    Like, have had been able to push clients towards this who came in the door with other expectations? Has it actually helped you close?

    • I’m not sure it’s helped us close gigs, but it’s definitely helped us manage expectations and teach our clients. And it’s probably helped us close some business, too. I don’t have any good data on it.

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