Setting a Marketing Budget – Begginer’s Guide

Setting a Marketing Budget – Begginer’s Guide

Everyone who is given a marketing budget has to decide how best to spend it. Odds are they also have a series of goals as well as KPIs that help to measure progress towards those goals.

Your job as a marketer is to figure out the most effective way to allocate that budget by channel, tactic, and by an audience in order to meet and exceed your goals. Today we’ll cover an exercise that helps you figure out how to do that.

Before we get too deep into this, I want to say there are counterexamples to what I’ll show here; particularly as we move into brand marketing and consumer products. There are also channels where your effectiveness will increase significantly as you spend more. This is more likely to occur when your goal is building awareness of and mental associations with your brand across an audience of millions of people. After all, it’s hard to do that for a few thousand dollars at a time.

So while I think the theory is useful across the board, let’s stick primarily to digital marketing channels for the exercise today.

Also, some assumptions on my side:

• First, you understand Return on Ad Spend (ROAS). Simply put, it’s the value of the customer activity you drive, divided by what you spent on media. It’s like ROI, but only takes your ad spend into account.
• Second, you are confident in the conversion value you are assigning. Whether you want this to be the immediate sale/contract value or an estimated lifetime value is up to you. I talked about how to measure LTV a while back and would recommend using some kind of conservative modifier because LTV is a nasty beast.
• Third, you’re calculating ROAS using gross margin, not revenue. Revenue alone doesn’t pay the bills, so make sure your return is actually money you can use to fund operations.

If all of that sounds good to you, then we can jump into the exercise.

Let’s say you are a marketer with a ROAS goal of 3.0, meaning for every $100 you spend on marketing you need to drive $300 of gross profit. You know that direct response marketing channels tend to decline in performance as you ramp up marketing spending. And luckily you’ve been running ads for a while now at different budget levels and can roughly sketch out what your effectiveness curve will look like.

The below chart is hypothetical, but it’s similar to what almost every marketer will see as they scale. Pick a time period, be it a week, a month, or whatever makes sense, and look at the ROAS you can generate at different spend levels. From there, it’s your job to figure out what the key inflection points are so you can optimize your budget.

If you don’t know what this chart looks like yet, then spend different amounts for a few weeks and see what happens to performance. You will also be adding data points to this chart over time so you can continue to update what it looks like.

I’m going to focus on 3 key points on this chart that offer tiered options for marketing budgets. These are in order from most conservative to most aggressive.

A. Maximize total ROAS

This is where the Total ROAS and Incremental ROAS lines start to diverge. In the chart above that occurs right around spend level #4. This is the maximum amount you can spend before you start to see a significant degradation in performance. It’s still well above your allowable ROAS, but if you have a long payback period and need to conserve cash flow this may be a good option for you.

B. Scale until incremental ROAS hits the threshold

This occurs when the Incremental ROAS line intersects the ROAS Target line. In the chart, this option happens at spend level #6. From this point forward, every dollar you spend returns less than the 3x threshold that you’ve put in place. If you take your ROAS target to mean “don’t spend a dollar that doesn’t return 3 dollars” then this is your budget limit.

C. Scale until total ROAS hits the threshold

As your incremental ROAS continues to fall, it will pull down the overall ROAS of your program. The final option, showing up in the chart just before spend level #10, is spending up until the Total ROAS intersects with the ROAS Target line. This maximizes your profitable spend to exhaust the audience who can collectively reach a 3x ROAS. It does mean that the latter portion of your spending will not drive a 3x return, however.

An obvious but important point is that if spending to your Total ROAS/ROAS Target intersection involves spending money that returns less than 1x, DON’T DO IT! Just stop when you aren’t getting $1 back for every $1 spent.

The nice part about this framework is that it’s very flexible and can be updated over time. For instance, maybe you’re doing awareness advertising that doesn’t have an immediate and direct ROAS. You can run the same exercise with CPM as the y-axis.

Or maybe you are in a very competitive space and just raised a lot of money to scale. Well, now you can drop your target ROAS to something like 1.25 and really unleash the money cannon. The key is knowing what an acceptable return looks like for your goals.

From an updating perspective, every time period you are spending money you can add it to the model. Maybe you have gotten 25% better at marketing since last year and so now the budget you can spend at an acceptable ROAS has increased. Feel free to play with weighting factors or remove older data points as necessary to keep your model up to date. Just follow all the in this post while setting a marketing budget for you or for your clients.

And now let’s get really weird.

You should have a model like this for your company’s marketing program, but you could also have one for each channel. Of course, some channels get used for multiple purposes. So now maybe you need a chart for lead generation campaigns versus account creation campaigns, or new customer purchases versus repeat buying.

And then there is the interplay between marketing channels. After all, how much you invest in some channels (e.g., video) could impact the awareness of your product, thus improving the response and therefore profitability of other channels (e.g., social).

This can get complicated but in an exciting way! The important thing here is to not force yourself to be perfect from step 1, but instead to have a measurable process in place that helps you understand how much you can spend and where you should spend it.

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