The Ultimate 5 Step Marketing Budget – Part 1

Annual planning. It’s that time of year to set your marketing budget, or maybe it’s always that time of year for your business. Personally, I love the planning cycle; it’s an inherently optimistic time of year as departments discuss all of the big growth ideas for the following year and compete for resources. How exciting! (Yes, I’m a planning nerd and I own it.)

The process of setting the marketing budget usually falls into one of two general categories in enterprise businesses: fixed marketing budgets determined by the finance team, marketing budget recommendations provided by the marketing team.  Either of these options can leave you in a scenario with a marketing budget that will not meet the organization’s user or revenue goals as marketing teams may lack the detailed understanding of the organization’s finances and finance teams lack the nuanced understanding of scaling marketing spend. Results the following year are expectedly painful.  

There is a more collaborative budgeting process that can reduce this risk and better align marketing spend with your company’s objectives.  The 5 step process outlined below gives your marketing and finance teams the ability to collaborate on the budget and present a unified recommendation that increases the likelihood of meeting or beating those monthly targets.   

5 Step Marketing Budget Process

1. Business Goal Setting
2. Finance Constraints
3. Total Marketing Budget
4. Working Non-Working Budget
5. Channel and Funnel Strategy

The simplicity of the process is not meant to suggest that budgeting is easy, or that there is a lack of discussion and give-and-take between stakeholders.  Instead, this process intends to outline the order of operations and open conversations that build trust and understanding between teams. In this first article in the series, we’re going to dive into Step 1: Business Goal Setting

Business Goal Setting

The process starts with the goal in mind. The process is the same if your goals are centered around acquiring customers, increasing revenue, or maximizing profit. The first step is to establish your targets.  The output of this process is a clearly defined set of monthly targets for new and recurring business. 

Companies should establish a single north star metric, with guard rails for supporting metrics.  For example, you may set a North Star goal of increasing revenue by 40%, with a guard rail of not allowing the profit margin to fall below 15%.   As you can see in this example, which admittedly is a little extreme to demonstrate the point, profit margin falls year over year but overall revenue and profits are up.  Including this trade-off as part of the plan reduces swirl as some KPIs exhibit negative year-over-year growth while others soar.  

Fig.1 

New vs. Recurring Revenue

The next step is to understand how much of the forecasted revenue is recurring, which should require considerably less marketing spend to secure. Figure 2 shows a breakdown of revenue from the same example above. In this breakdown, recurring revenue increases from 40% to 44% of total revenue. This improvement generates $22M of the $40M revenue growth.  The marketing budget required to generate this recurring revenue will vary by business.  Subscription business models require considerably less marketing spend to generate recurring revenue than traditional e-commerce models, but as a general rule of thumb, customers cost much more to acquire than retain.

Fig.2 

Timing

Finally, the timing of revenue needs to be established.  Key factors impacting the timing of revenue include launch dates for new products and features, the seasonality of the business, and the seasonality of spend.  The example below considers the effects of seasonality and product launches along with improved recurring revenue assumptions.

Fig.3

If you’ve made it this far, you now know the goal your marketing budget needs to support.  In the next article in this series, we delve into financial constraints around the marketing budget.