How to think about your marketing budget
A marketing budget is just like any other investment you make. This point holds true for personal assets (like stocks) or business investments (like equipment, employees, training, etc.)
Essentially, you are taking capital and placing it in something, hoping you get a return. Marketing and advertising are no different. You need to do your due diligence and understand what you’re getting yourself into.
That’s what we want to show you today.
1. How you should divide your marketing budget
2. How you can get the best return on your investment
The current climate
The situation for business owners today is pretty challenging. In the past, not everyone was using digital marketing. The innovative little guy was able to get an edge.
However, these days, everyone is using digital marketing. If you’re competing against more prominent businesses, they probably have monster budgets. So, you need to find a way to outsmart them.
Another problem you must confront is the rising cost of digital advertising. The main reasons for this are:
a) increased competition
b) data privacy laws have made advertising less precise because businesses can’t use third-party data to track customers.
- Competition is fierce
- Your competitors probably have a bigger budget
- It’s getting harder to target potential customers.
Every marketing cent counts nowadays. You need to know where to put it and how to maximize each channel.
So, let’s see how you can do that.
Step 1: Set your budget
You need to set a budget before beginning to divide and manage it.
Setting the right budget depends on:
a) your business
b) your growth plans.
New startups aggressively capturing market share can have advertising budgets in excess of 20% of gross revenue. Many new businesses — flush with VC money — can have far more!
But, if you’re a fairly established business, around 5% to 12% of gross revenue is considered good.
It’s important to remember that these figures are rough guides. A CMO/Deloitte survey shows the variance in marketing budgets between industries.
So, you have a choice here. You can:
- Set a budget by benchmarking against your industry
- Define your goals and set a budget accordingly
How to set your budget by defining your goals
You can do a rough calculation to estimate what budget you will need to reach your goals.
For example, your goal is to grow your revenue by $1m over the next year.
First, you need to calculate what each customer brings, on average, per year.
If each customer generates $1,000 in revenue, you need 1000 new customers. ($1m / $1000).
To break even, your marketing budget would be $1m. But you want to make money, not break even! So, think about your gross profit margin. Let’s say it’s 40%. Then we take 40% of $1m, meaning your marketing budget is $600,000.
Divide your budget ($600,000) by your 1000 new customers, and you’ll get $600. That is the average cost of acquiring each new customer.
Now, of course, the gross profit margin you need to survive will vary. Remember, everything from your staff, premises, taxes, insurance, equipment, materials, and more need to come from this profit. So adjust it as you see necessary.
The key here is that if you want to scale or expand quickly, you’ll need to do a lot of marketing and advertising. So your budget will need to be larger. It’s all fairly straightforward.
Pro tip: Don’t forget to allocate marketing budget to customer retention. It’s cheaper than acquiring new customers.
Step 2: Define your goals
We always say that you need to know what you want to achieve before you launch any campaign.
There are two great reasons for this:
a) It will help guide your decisions
b) You will be able to measure if your actions were a success
So, set out your goals.
What does your business need to achieve this year? Are you trying to expand? Launch new products? Fend off an aggressive competitor?
Here are some example goals that many businesses use:
- Increasing sales
- Boosting conversion rates
- Increasing web traffic
- Improving brand awareness
- Retaining existing customers
- Cross-selling or upselling to existing customers
Figure that out, and then it’s time for the first division of your marketing budget.
It should be split into two distinct categories.
A) Converting new customers
B) Retaining existing customers
Step 3: Figure out which channels you need to use
Marketing and advertising are about getting your brand in front of the right people. And to do that, you’ll need to know where they congregate.
You’ll have done much of this during your product or service design stage. If you do the right market research, you should have a good idea of your ideal customer and their demographics. From here, you should be able to predict what platforms you can find them on.
Of course, platforms like Facebook and Google are so vast that they contain almost every type of customer imaginable. Advertising through these channels also gives you access to a wide array of networks like:
- Millions of blogs
If you throw Bing on top of that, you’ll have the potential to reach a huge global audience for even fairly niche products.
From here, you should write down any channel you plan to use.
- Search ads: Google, Bing, etc.
- Social media ads: Instagram, Facebook, etc.
- Content marketing: Things like blogs and videos.
- Social media marketing
- Influencer marketing
- Email marketing
- Referral programs
Step 4: Consider the ROI of each platform
By now, you should have:
- Defined your goals
- Set your budget
- Know which channels to use to reach your prospects
- Have a plan in place to retain customers
So, now it’s time to think about the relative cost of each platform.
Let’s examine a few of them and examine the pros and cons.
PPC advertising: PPC advertising can cost a lot of money. However, it’s a super effective way to reach a lot of prospects, and it gets quick results. So, while it does require a high initial investment, your ROI can be excellent.
Social media advertising: Social media advertising is another great way to target a huge audience. Platforms like Facebook and Instagram are used by most people, so advertising on these channels can get instant results and provide a good ROI on a high spend.
Social media marketing: If you do social media marketing yourself, it’s pretty cost-effective. However, you can have trouble attributing sales. Additionally, it can take time to start generating results.
Email marketing: Email marketing is really cost-effective. Additionally, you can track its effectiveness pretty well. However, unless you’ve got a huge list to target, it might not produce results.
SEO: SEO is relatively inexpensive, but it takes time to produce results. It’s good to use in conjunction with other tactics.
If you’ve been running various campaigns for a while, you’ll have data about what works and what doesn’t. Even if you don’t, you should always keep an eye on your ad spend and try to attribute it to specific channels. Additionally, always test your creatives and your copy, so you can fine-tune your ads.
Step 5: What’s the right strategy?
There is no right strategy for every business. Each business is unique and targets different customers. Businesses in similar sectors can be set up to serve unique demographics, price points, and other considerations.
Let’s explore a few strategies for different types of businesses.
If you’re an eCommerce business, you’ll need to think about ROAS (return on ad spend).
At a simple level, you need to understand how much revenue your average customer will generate. From there, you can work out an acceptable cost for acquiring new customers.
Additionally, you should also look to spend money on engaging your existing customers. These people can be very responsive to advertisements, giving you a very high ROI.
Retargeting campaigns are a good choice here. Facebook, Bing, Google, etc., all offer you a way to plug in your existing contacts and serve them ads as they browse the internet.
If you’re running a restaurant, you’ll need to take a different approach. For example, Google and Bing offer local advertisements.
A mix of social media and search ads should do the trick here. But don’t ignore email marketing — it’s a great way to get returning guests.
Professional services like lawyers and private doctors have some of the highest PPC advertisements. However, these competitive niches tend to generate a high return.
Google My Business is a good option here. Similarly, PPC search ads can be very good.
For professional services, there is a quality vs. quantity argument to be made. Casting a wide net means reaching more people, but are they the right people for your business?
Google Ads offers a way to deal with this issue. For example, you can target customers based on education level, job title, etc. These options can ensure you are getting conversions that will justify a higher portion of your budget.
Marketing budget tips and tricks — and mistakes to avoid
Good marketing requires a bit of risk and a lot of experimentation. You must be vigilant and tweak your creatives and settings to find a winning formula. However, the path toward optimized ads is full of pitfalls.
1. Always collect data
This step is critical. You need accurate data to judge whether a campaign or channel produces results. If you don’t measure your campaigns correctly, you could throw money down the drain.
Attribution has become much harder due to the death of third-party cookies. So businesses are being forced to get creative when optimizing their campaigns.
2. Don’t be too rigid
If it’s not broken, why fix it? Yes, that’s true. But only up until a tactic stops producing results. Always leave a little room for exploring and optimizing your ads because what worked yesterday or last year can suddenly stop. So you need to have a few other ideas ready to go.
3. Don’t only focus on new customers
Some companies are so obsessed with acquiring new customers that they neglect their current clients. There are a few reasons why this is a bad idea:
- If you’re leaking customers, your ad spending will need to be huge to stay in profit
- Existing customers are about 5X cheaper to retain, they generate revenue, and you can cross and upsell them profitably.
So make sure to allocate some budget to retarget these users.
4. Know your sales funnel and your sales cycle
Become obsessed with your sales funnel and your sales cycle. Really get to know and measure each step. Then, you can identify the bottlenecks that are hindering growth.
Once you’ve outlined the areas causing you issues, you can start to direct your budget towards some of these issues.
- If your sales funnel is underpopulated, investing in brand awareness
- If you’re not retaining customers, try retargeting
- If you’re not converting prospects, invest in good content marketing that sells your products
How Amanda AI can help you get the most from your ad spend
Advertising on Google, Bing, and Facebook are expensive. But there’s a reason for that: it gets results!
Amanda AI was built to help businesses earn the maximum from their ad budgets. Our machine constantly tests and updates your ads and serves them to the right people at the right time.
By using our AI and ML tools, you can set your budget and let our machine do the work of connecting you with customers who will make a difference to your bottom line.
In an era where attribution is becoming difficult, many marketing teams aren’t sure how to test what ads are producing results. Amanda AI’s impact-driven model solves this issue by adjusting your ads up to 5 million times per day.
Amanda AI can create your ads, target the best keywords, and ensure that your budget is being used to full effect.