We’re back with the third installment of The Ultimate 5 Step Marketing Budget. Learn a simple formula for estimating your top-level marketing budget. In the beginning of the series we set our business goals and set financial guardrails. At last, we’re ready to build out the high level marketing budget. As a reminder, this is the full process.
5 Step Marketing Budget Process
- Business Goal Setting
- Finance Constraints
- Total Marketing Budget
- Working Non-Working Budget
- Channel and Funnel Strategy
Total Marketing Budget
We’re solving for how much money is needed to achieve next year’s business targets in this article. But first, let’s quickly recap the prior steps. The business chose revenue in Step 1 as it’s north star metric and set a target of $140M, which represents 40% year-over-year growth. New revenue will account for $22.5M of the total. New revenue grows over 60% Y/Y.
| Year 1 | Year 2 | Y/Y Growth | |
| Total Revenue | $100.0 | $140.0 | 40% |
| % Recurring | 86% | 84% | -2% |
| Recurring | $86.0 | $117.5 | 37% |
| New | $14.0 | $22.5 | 61% |
Here’s the monthly breakdown.
| Monthly Revenue Forecast | ||||
| Month | Revenue | New | Recurring | Notes |
| January | $7.0 | $1.2 | $7.6 | Low Season |
| February | $9.9 | $1.7 | $7.5 | |
| March | $11.7 | $1.9 | $8.0 | New Product Launch |
| April | $14.6 | $2.1 | $8.6 | |
| May | $14.6 | $2.3 | $9.3 | Summer Bump |
| June | $14.6 | $2.2 | $10.1 | |
| July | $13.4 | $2.2 | $10.8 | |
| August | $11.7 | $1.9 | $11.2 | |
| September | $9.9 | $1.7 | $11.5 | |
| October | $8.8 | $1.5 | $11.4 | |
| November | $11.1 | $2.1 | $11.1 | Holiday Sale |
| December | $12.8 | $1.8 | $10.4 | |
| Total | $140.0 | $22.5 | $117.5 | |
In Step 2, we established a CLV:CAC ratio guardrail of 1.4:1 or better. Our Current CAC is $60 and CLV is $90, so we have a little leeway on the ratio in order to achieve our growth targets.
| Year 1 | Year 2 | |
| CAC | $60 | $64 |
| CLV | $90 | $90 |
| Ratio | 1.5:1 | At least 1.4:1 |
That’s enough recap. Onward to the annual plan! With our monthly targets for new revenue and CAC guardrails, determining monthly acquisition spend becomes a relatively simple formula.
Marketing Spend = ( New Revenue / AOV ) x CAC
Here is the result applied to our monthly revenue targets. Remember, we expect the increase in acquisition to cause the CAC to increase from $60 to $64 y/y.
| Month | New Revenue | AOV | CAC | Budget |
| January | $1,200,000 | $30 | $64 | $2,560,000 |
| February | $1,700,000 | $30 | $64 | $3,626,667 |
| March | $1,900,000 | $30 | $64 | $4,053,333 |
| April | $2,100,000 | $30 | $64 | $4,480,000 |
| May | $2,300,000 | $30 | $64 | $4,906,667 |
| June | $2,200,000 | $30 | $64 | $4,693,333 |
| July | $2,200,000 | $30 | $64 | $4,693,333 |
| August | $1,900,000 | $30 | $64 | $4,053,333 |
| September | $1,700,000 | $30 | $64 | $3,626,667 |
| October | $1,500,000 | $30 | $64 | $3,200,000 |
| November | $2,100,000 | $30 | $64 | $4,480,000 |
| December | $1,800,000 | $30 | $64 | $3,840,000 |
| Total | $22,600,000 | $48,213,333 |
Now I know what you are thinking. “You want me to spend $48.2 million to generate $22.6 million in new revenue?!” Remember, this subscription business has a high rate of recurring revenue. Below, you can see the revenue from customers acquired in 2021 very quickly outpaces the revenue from new customers acquired on any given month. In total, the $48M in marketing spend is driving $93M in revenue for the year. Not bad! In addition, there is legacy returning revenue – that is the repeat revenue from customers acquired in earlier years.
But what if your product does not have a high repeat rate? If you have a product that requires more spend to generate repeat purchases, you can include the cost of generating a repeat purchase. If that information is not readily available, a rule of thumb is that retention cost per customer is 1/5 of the acquisition cost. In that case, the monthly budgeting formula would be as follows:
Marketing Spend = (( New Revenue / AOV ) x CAC) + (( Recurring Revenue / AOV ) x CAC/5)
In this scenario, the break-even period for a customer is usually far shorter, allowing for the business to remain profitable, even when paying for repeat purchases.
Is the Marketing Budget Too Big?
We now have a top-level marketing budget recommendation of $48M, or just under one-third of annual revenue. To be clear, this is a large percentage, but 40% annual growth is also a large target. Based on the current business dynamics, that is the budget required for the goal. If that does not seem palatable to your executive team, the next steps would be to find ways to lower total CAC by driving organic referrals, increase average order value and retention rates (thus increasing revenue), or revise goals.
If the new product launching in April can improve average order value by 10% and other process improvements can decrease CAC by 10%, the business could achieve the goals at a cost of $42M, a savings of $8M. (see below)
| Month | New Revenue | AOV | CAC | Budget |
| January | $1,200,000 | $30 | $60 | $2,400,000 |
| February | $1,700,000 | $30 | $62 | $3,513,333 |
| March | $1,900,000 | $30 | $64 | $4,053,333 |
| April | $2,100,000 | $33 | $64 | $4,072,727 |
| May | $2,300,000 | $33 | $62 | $4,321,212 |
| June | $2,200,000 | $33 | $61 | $4,066,667 |
| July | $2,200,000 | $33 | $60 | $4,000,000 |
| August | $1,900,000 | $33 | $59 | $3,396,970 |
| September | $1,700,000 | $33 | $58 | $2,967,273 |
| October | $1,500,000 | $33 | $58 | $2,618,182 |
| November | $2,100,000 | $33 | $58 | $3,665,455 |
| December | $1,800,000 | $33 | $58 | $3,141,818 |
| Total | $22,600,000 | $42,216,970 |
Next Steps
In the next article in the series, we’ll take our top-level marketing budget of $42M, with a contingency plan of $48M, and break the budget down into working media and non-working budgets. See you next week!
