Marketing theory for non-marketers: Budgeting
How do you prepare the marketing budget for your business? Most organisations calculate – or estimate – the percentage of funds they want to dedicate to marketing, then ‘build out’ their marketing plan within this figure. On the face of it, this approach makes business sense. After all: you don’t want to spend more than you can afford. But in doing so, how can you be confident you’re achieving maximum bang for your buck? You can’t. Successful marketing budgeting is about knowing what you want to achieve, and building a budget that satisfies both your expectations and your accountant. Here’s what you need to know when developing yours.
The first step
A successful marketing budget doesn’t start with numbers. Instead, it begins with a functional marketing plan.
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If you’re looking to build your marketing budget for the year but haven’t yet defined your wider marketing strategy, stop and return to zero. First, build your plan with the help of our guide to marketing planning. Doing so will provide your budget with structure and purpose. A failure to plan means you’ll have no criteria on which to judge your budget – and therefore no idea whether it’s right or wrong for your business. If your marketing team asks what their marketing budget is before showing you their plan, politely show them the door.
What should your budget look like, and how much time should budgeting take?In short, your budget should offer a clear explanation of the sums you will spend on different types of marketing activity in the budget period, against the objectives defined in your marketing plan. Crafting your budget is a cyclical process of defining your plan, then stretching your budget to accommodate this plan, and tweaking both elements until confident your budget will achieve your plan. When you’ve hit this point, stop. Your budget could be presented via a short word document or a spreadsheet. What matters is that your document contains adequate detail for your business and can be understood by stakeholders with and without marketing knowledge. The budget for a larger business will contain more ‘layers’ - greater detail given the more complex nature of the organisation. What won’t change is the budget’s core purpose: to record how much will be spent on different types of marketing activity over the budget period. In resource terms, budgets can take surprisingly little time to put together – only a day or two for small to medium-size businesses, providing a watertight marketing plan has been put together beforehand. Developing your strategy should take considerably longer than the budget itself.
How often should I budget, and for how long?This will depend on the nature of your business. Once set, a good marketing budget should offer a rolling view of performance and should be revisited at least every quarter to prevent discontinuity. Reviews should increase in frequency for larger budgets and when running major marketing campaigns. And remember: writing a 2018 budget on 31st December 2017 is unlikely to be useful. How far ahead should you budget for? Again, this rests on your business type. For an accountancy firm retaining customers for more than five years, it’s appropriate to run a five-year budget. An engineering firm with a handful of energy supplier customers will want to take a much longer view.
What should your budget leave out?Knowing what to include and what to shelve from your budget depends on the parties using the document. An effective marketing department is one with buy-in from all board-level members of a business. Marketing directors should host an open discussion on their marketing goals and plan in the context of the business’ wider success. Financial directors and chief executives should then help ‘close the loop’ on the marketing director’s budget, having first agreed to their plan. A marketing budget should not be a figure given to a marketing department by a board. Instead, it should be the product of a constructive dialogue. As such, a marketing budget should not include excessive detail understood only by a marketing director. It should be simple, actionable and measurable. It should not include granular detail on marketing activities like the number of brochures to be purchased, as doing so obscures the relationship between spending and ROI. It is more sensible to list budget items by their common goals – by new customer acquisition, for example. While this can make accountants’ jobs more difficult, the ROI for each item is clearer and the budget more useful.
What should your budget include?Budgets for both B2C and B2B businesses should include two core components, with their budget increasing in complexity as they grow in size:
- Metrics. Determined by your marketing goal, metrics are intimately connected to ROI. After all: if you cannot measure the success of your business’ activity, you cannot improve on it. If your marketing goal is to improve repeat business by 20%, for example, this is what you should measure. As such, possible metrics are Cost per Acquisition (CPA), Customer Lifetime Value (LTV), percentage increase in revenue from existing customers, number of new customers, and number of leads generated (with a ‘lead’ firmly defined beforehand). Notice that all these metrics measure what your marketing should achieve in business terms, and not what the marketing should achieve in marketing activity terms.
- Responsibilities. Your budget should name the individuals responsible for the achievement of each particular goal. Doing so, and measuring their performance against each goal, increases the likelihood of those goals being met.
A successful budget will enable a business to achieve the goals set out in their marketing plan, and feature checks and balances to track whether the business is making adequate progress towards those goals. Outlining metrics, ROI and responsibilities covers off these elements in one framework. It’s also worth sense-checking your budget against last year’s figures. Consider your sales performance against your marketing expenditure. Is your new budget wildly optimistic, or could it work harder? A budget designed to grow a business will feel optimistic but not risky. If your budget feels too comfortable, reconsider your figures. Your marketing budget is your shopping list for success. Plan it, refine it and revisit it regularly. How is your marketing department performing? Find out with our Marketing 360 Healthcheck.