Creating Your Marketing Budget Again? Part 3: Hybrid — The “Marketing Fuels Growth” Approach
This is the last part of my three part blog series on creating a marketing budget. All posts can be found here.
It’s the time of year to create your marketing budget, and I’ve been teasing you throughout this blog series explaining popular approaches to creating a marketing budget while also admitting I don’t favor those particular approaches.
It is this third, hybrid approach to creating a marketing budget that I currently believe in. It is the approach we have taken here at Betsson Group, where we’ve gone about marketing budget setting in a fair, holistic, agile yet pain-free manner.
Now, it is without further ado, I am introducing to you — the hybrid approach!
In my opinion, the best way to develop a marketing budget is to treat the marketing budget for what it is: An investment.
This implies that it is:
- A spend that delivers an expected, quantified return over time
- A budget that fuels the growth of the company and its revenue.
In order to build a strong business case to support this concept, marketers must understand the dynamics of the customer acquisition funnel, as well as have a complete control over their CPA per market, product and acquisition channel.
Attribution modeling is essential to get this approach right as marketers need to take a deep dive into how new potential customers enter in the top of the funnel, how much has to be invested to find those prospects, in what proportion across the various touch points that lead to a site visit, registration and commitment and to help users move through the revenue cycle.
Concretely, this hybrid model goes like this:
- Company revenue targets are set for the following year
- Based on the average customer lifetime value and the forecasted churn rate, the Finance department calculates how many new users are needed to reach this revenue target
- Based on the average cost per acquisition, marketing is in a position to give an exact estimate of the total marketing budget that is required (number of new users X cost per acquisition = pretty straight forward!)
- Icing on the cake, marketing has 3 opportunities to over-deliver the following year:
- Achieve a lower CPA by optimizing the marketing mix and exploring cost-efficient acquisition channels such as content and SEO
- Increase the average customer lifetime value (if it improves, less volume of leads will be required to bring the revenue) with optimisation brought in to customer relationship management such as personalization and automation as well as bringing in new opportunities to inform and delight users (chat, in app push notifications…)
- Improve the conversion rate from site visit to registration and purchase, as this is the most common area of marketing budget hemorrhage.
Now for those tips I’ve been promising you!
Very few marketers work this way with the Finance department, but I recommend looking into this. Worst case scenario it is an interesting thought experiment for both CMOs and CFOs.
We will start with the (big!) assumption that the CFO and CMO are completely aligned and both parties view marketing spend as an investment.
The next step is that they will also recognise that marketing spending delivers returns in a more or less immediate future. For instance, significant investment in a new logo and creative on TV may not yield within the same quarter as creative agency invoice because it takes time for the TVC to be noticed and to have an impact on brand awareness and brand perception. Furthermore, this new creative may be used for a couple of years.
The logical conclusion of this delayed effect is that the marketing investment should be amortised over a period of time during which the benefits are accrued. Amortisation is used for many budget items such as equipment, so why should marketing be treated differently? Amortisation allows marketers to think longer-term and to invest in long-term yet impacting programs such as brand building or SEO and content, without having to try and make these long term activities fit into a shortsighted quarterly format.
I am often asked about the breakdown of budget allocated to marketing tactics and budget allocated to production and operations.
No magic formula here, but I try to remain in the area of 10%.
So, for Euro10million marketing budget, you keep Euro1million aside for
- The production of TV commercials, banners, microsites, landing pages…
- Sponsorships deployment
- Insights and analytics, including some pretty hefty tools enabling ad serving, tracking, attribution modeling, competition watch, customer satisfaction, test driving creatives before they’re launched in a market etc.
Ok, so you have your budget. Now, what should you be spending it on?
As the economy stabilises and begins to rebound, marketing budgets remain healthy and are predicted to grow, mostly around digital and content marketing. According to theContent Marketing Institute, as of 2014:
- The most effective B2B marketers spend 39% of their marketing budgets on content
- 59% of marketers expect their organisation’s content marketing budget to increase spending in the next 12 months
Similarly, the Custom Content Council said:
- Marketing budgets are heading up 13.7% year-over-year
- Content will make up 37% of that spending plan (2013)
Overall, companies are spending money on marketing because it matters to the bottom line. The amount each company spends differs according to a number of factors including business type, revenue and growth goals, but the message is clear: Unless you have all superiorities (product, people, affiliates), spending less than 10% of your revenue isn’t going to cut it.
In order to see growth, companies, especially the ones in a strong growth phase, need to invest heavily in the mechanism that promotes, sells and creates this growth. That mechanism is marketing.
Are you a seasoned creator of marketing budgets? Think I missed anything or have tips to share? I would love to hear them in the comments!