Figuring out how much to spend on marketing is challenging.
On one hand, there are the bootstrapped founders priding themselves on not spending any money on marketing, an approach that is often more ideological than practical. While it is worthwhile to aspire for pure organic growth, dogmatic opposition to paid advertising can be detrimental as markets mature and competition increases.
On the other hand, there are the VC funded unicorns who throw cheap capital at the problem sacrificing profitability for market share. This approach is a gamble at best. It is not sustainable and has a very low chance of success.
In the middle, there is everyone else allocating a fixed % of their revenues. An arbitrary 4-12% is usually spread across tactical test & learn experiments in search of the one great acquisition channel. The simplicity of this approach is alluring, but advertising usually requires a minimum investment to be effective. Experiments without a strategic foundation and sufficient budgets end up producing misleading results or no results at all.
A better way to set marketing budgets
A realistic marketing budget should be based realistic marketing goals. Without the purchase funnel, budgets are destined to be arbitrary. Here are a few questions to help you find a realistic budget:
Do you really need a budget? Paid advertising is one of the many tactical options for achieveing your goals. What are the others? Can you come up with creative solutions that don't require big budgets to execute? For a small business, advertising should serve to amplify organic growth, not substitute for it.
What's the impact of achieving your goals? Let's say you managed to increased preference from 34% to 39%. How many additional purchases would that result in? What is the lifetime value of the new customers you would acquire? Setting a benchmark for success will help you understand how much value you create as a result of marketing, also known as return on investment.
What's the minimum required budget to achieve your goals? Given your goals, what is the minimum realistic budget that you need? Look at industry benchmarks and talk to other startups and agencies who are good at buying media, and you will start to get a sense for the investment needed to move the needle.
What's your time horizon? The higher up the funnel you go, the bigger the impact but the longer it will take to see any results. For example, increasing brand awareness will be effective but slow and expensive. Inversely, improving sales conversion will be quicker and cheaper but will have much smaller impact. Expecting short term results from long term investments often results in frustration. Make sure you set the right time horizon.
By combining creative thinking, incremental revenue, minimum required budget and a time horizon, you can start evaluating potential marketing activities as investments and your overall marketing efforts as a portfolio of calculated bets. This approach takes the guesswork out of budgeting, and protects you from the extremes.
Jeff Bezos was famously quoted for having said: "Advertising is the price you pay for having an unremarkable product". Amazon is now the biggest advertiser on earth. For the rest of us, the sweet spot is somewhere in between.
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