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How to Calculate Your 2022 Marketing Budget

November 24, 2021   /   by  Roger West

Whether the year is winding to a close or just getting underway, it’s always a good time to think about your marketing budget for the next year. As always, your challenge is to make the most of your budget while supplying the sales team with plenty of quality leads. But how much should you spend, and where should you spend it? Fortunately, there are some tried and true guidelines that can help you build a marketing budget that’s right for your business.

How Much Should You Spend on Marketing?

According to the 2021 CMO Survey, organizations spend between 10.4% and 13.7% of their total company budget on marketing, although that number varies a bit from industry to industry. That may give you an idea of what your total budget should be, but you also want to think about how it’s going to be divided up.

In today’s tech-first world, marketing budgets continue to shift more of their resources toward digital efforts. CMO Survey respondents, 94.1% of whom are VP level or above, indicated that digital marketing made up 58% of their total marketing expenditures in 2021, a 15.8% increase from the previous year.

In addition to dividing up your marketing budget by digital and traditional methods, you need to determine how much to allocate to each channel. Should you focus on direct mail and paid search, for instance, or should you invest in content marketing and trade shows? The easy answer is to spend the most money where you’re getting the most return. 

To figure out which channels are paying off the most, and where to place more of your budget, you’ll need to track attribution to see where your leads are coming from. Of course, tracking attribution across multiple channels can get complicated very quickly and it’s often impossible to credit a single channel with the conversion. Even so, good analytics tools can help you determine which channels perform consistently well and which ones are a waste of time and money.

You’ll also need to factor in overhead costs of the marketing department, such as specialized staff, training, and the marketing tools and software you use. 

But let’s back up and take this one step at a time.

5 Easy Steps for Creating Your Marketing Budget 

1. Consider Your Revenue & New Customer Goals
Any good marketing budget needs to establish clear goals for revenue growth and new customer acquisition for next year. To determine these objectives, you should first consult with your board of directors, investors, and marketing team to figure out what is reasonable. Once you have your topline goals in place, you can think about how to achieve them and then plan your budget accordingly.

For example, let’s imagine that your marketing team wants to acquire 100 new customers by the end of the fiscal year. Instead of asking how to allocate your budget in general, your question should be: “How much do we need to spend to bring in 100 new customers?” 

To answer that question, you need to know how much it costs to acquire a new customer, which is determined by looking at two separate data points: cost per lead and conversion rate.

2. Calculate Your Average Cost Per Lead
Your cost per lead (CPL) is an indication of how much marketing spend is needed to gain a new lead. It’s a relatively simplistic, but effective, measure of how well your marketing efforts are performing.

To find your CPL, divide the total amount spent on marketing by the number of leads generated. For example, if you spend $100,000 on marketing and generate 1,000 leads, your cost is $100 per lead.

Tip: You can use this same equation to calculate your cost per lead for each marketing channel you use. This will help you make decisions about how to allocate your marketing budget across channels.

So, what is a healthy cost per lead figure? It’s difficult to provide a firm answer, since the average amount spent varies greatly by industry and company size. A quick Google search will reveal figures ranging anywhere from $50-$300, but most of these results are based on data that’s both limited in scope and severely outdated. A frequently-cited 2017 Hubspot report pegged the overall average at $198, but the survey looked at only 350 companies of wildly different sizes across multiple industries, so that number should hardly be considered a gold standard.

For the purposes of crafting your marketing budget, a simple CPL calculation is useful for telling you how well you’re doing at generating leads at any given moment. Once you start collecting CPL data, you can benchmark your performance over time. It’s also helpful for comparing the performance of different channels against each another. This will help you determine which marketing efforts are likely to produce the best return on investment (ROI).

3. Calculate Your Average Conversion Rate
Generating leads is great, but if you’re not converting them into paying customers, then they’re not much more than a vanity metric that isn’t getting you closer to your business goals.

The formula for your conversion rate is the number of sales divided by the number of leads generated. You can also use this same equation to calculate your conversion rate for each marketing channel you use, just like the cost per lead.

For example, if you generate 1,000 new leads, but only 50 of those become customers, then your average conversion rate is 5%.

If you don’t have access to internal reporting data to help you determine an accurate average conversion rate for your company, then you may have bigger challenges than setting up your marketing budget. Without data that provides visibility into how your marketing efforts are contributing to sales, you’re basically throwing money into the wind and hoping it lands in the right place. Make the modest investment into the right marketing technology

. Note: A marketing automation tool can be an invaluable resource in helping you determine attribution, cost per lead and conversion rates – as well as helping you generate and nurture leads. If you don’t have a marking automation tool, that may be something you want to include in your budget.

Once you have a good idea of how much a new lead costs you and how many of those leads you’re likely to convert into customers, it’s time to finalize your annual marketing budget.

4. Determine How Many Leads You Need
Your next step is to figure out how many leads your company will need to reach your new customer goal. The best way to determine this is by dividing your new customer goal with your average conversion rate.

Let’s be optimistic and imagine that your company has a goal of 100 new customers with an average conversion rate of 10%.

So: 100 ÷ 0.1 = 1,000

That means you’ll need to generate at least 1,000 new leads in order to reach your goal of 100 new customers.

5. Determine Your Final Conversion Costs
Once you know how many leads will be required to achieve your goal, you can go back to your CPL calculation to determine what your final marketing budget should be. Keeping with the previous examples, let’s assume you need 1,000 new leads and your average cost to generate each lead is $100.

Now simply multiply the two numbers together to arrive at your final marketing budget.

So: 1,000 x $100 = $100,000

That means in order to get 100 new customers, your company should plan to spend at least $100,000 on marketing for the upcoming year.

The Bottom Line

If you want to get strategic about your marketing budget (and you should), then you need to be laser-focused on the two main statistics that impact your bottom line: cost per lead and conversion rate. These figures are closely connected, so it’s important to keep the relationship between them in mind as you adjust your strategy.

Prioritizing channels that provide a lower CPL will pull more leads into your marketing funnel, but sometimes quantity comes at the expense of quality. If your conversion rate goes down as your number of leads increase, that could be an indication that those new leads aren’t a good fit for your business. 

Similarly, if your CPL increases, but your conversion rate sees a big improvement as a result, it may be worthwhile to pay more for leads that are more likely to become customers. All these decisions, of course, depend on having accurate data about your marketing efforts. If you don’t have marketing automation tools in place already, make sure to factor that cost into your upcoming marketing budget. It’s an investment that will pay off significantly in the years to come as you’ll be able to fine-tune your marketing strategy and spend money far more efficiently.

Free Resource

We’ve created this handy dandy worksheet that makes it easy to calculate your marketing budget using the formulas discussed above.

Download Worksheet Need more help determining your budget or building a marketing strategy that really delivers? That’s what we do. Let’s talk
Roger West Creative + Code

Roger West Creative & Code is a full-service digital marketing agency that helps companies build brands, generate leads, and keep customers inspired and engaged. The agency provides a dynamic environment for marketing pros to innovate and team up with clients to drive traffic to vibrant places and send messages that pack a punch.