“What’s your budget?” it’s like the “How are you?” of the marketing world, except it’s not a great question to ask without the proper context. There are two common scenarios I have seen marketers usually face when discussing digital marketing budgets with brands.
Scenario 1: Marketer: What’s your budget? Brand: If you can hit X ROAS, then unlimited budget.
While this is technically correct (profitable businesses = free cash to scale), most brands do not have unlimited budgets. This is mostly because scaling up requires money for all parts of a business, including advertising. Brands need cash to maintain inventory, payment gateways, fulfillment, and staff, among other things. There are usually several barriers; if we scale the topline but stock runs out, we’re back to square one. Furthermore, the increase in monthly spending from $10,000 to $50,000 to $100,000 creates a strain on cash flow that many businesses do not anticipate. This is because most businesses calculate earnings monthly and plan for other variables that will facilitate growth in the next month or next quarter. If we spend without a budget cap, at some point the brand’s finance team will come knocking on the door to discuss cash flow and liquidity positions. In my opinion, asking “What’s your budget?” without providing the necessary context makes no sense.
Scenario 2: Marketer: What’s your budget? Brand: We’re not sure; could you suggest one? Marketer: (after meticulously going through previous sales, revenue, ad performance, ticket prices, and potential capacities for various sales scenarios on the channel) Here you go. Brand: No, it’s too high.
Many of us, including myself, are sometimes guilty of forecasting channel budgets in silos. However, I kind of stand by it because many brands just want to hear a number that marketers can hit in a particular channel without much question.
As I stated before, I think that asking “What’s your budget?” is a poor first question. A discussion is required when deciding on a marketing budget. I always want to go over their financials when deciding on a marketing budget for a new brand. Not too in-depth, but to get a sense of where they are and what is possible. A lot is lost if we need to scale back campaigns in the middle of the month to free up the budget for other aspects of the business.
If you want to be strategic with your marketing budget (and you should), you should focus on two key metrics that affect the bottom line: Cost Per Lead (CPL) and Conversion Rate (CVR) by channel. Prioritizing channels with a lower CPL will bring more leads into your marketing funnel, but quantity can sometimes come at the expense of quality. If your conversion rate decreases as the number of leads increases, it could mean that those new leads aren’t a good fit for the business. Similarly, if your CPL increases but your conversion rate improves significantly, it may be worthwhile to pay more for leads who are more likely to convert into customers.
These decisions depend, of course, on having accurate information about the cost of goods sold and other indirect costs. It is important to first understand the cost of sale and how it may change as the business grows. Gathering and analyzing this business data is an investment that will pay off big time in the long run because you’ll be able to fine-tune your marketing strategy and spend money more wisely. Once you have an understanding of the overall budget and margin, you can determine the optimal Customer Acquisition Cost (CAC).
How do you determine which initiatives will make the best use of your marketing budget? Well, you must first carefully consider what the brand is doing, why, and—more importantly—what they are not doing. In my opinion, no matter how large your marketing budget is, jumping on the latest trend without thinking it through is rarely wise or cost-effective. I think you should spend a big chunk of your budget on lead generation, another on converting leads, and a third on trying out new things. Even if your current marketing activities are highly efficient, you are most likely only scratching the surface of your marketing potential. It is crucial to try new things. I’m talking about marketing tactics the brand has never tried, innovative approaches that have never been considered, and creative tests that have never been thought of. It is also critical to invest in lead nurturing, but that is a topic for another day.
