How to Calculate Your Annual Marketing Budget
Thinking about your marketing budget for next year? As always, your challenge is to make the most of your budget while satisfying the sales team with plenty of quality leads.
But how much should you spend, and where should you spend it?
According to the CMO Survey, CMOs spend between 9.4% and 12.1% 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 break down.
In today’s digital world, the bulk of marketing budgets continue to shift to digital efforts.
CMO Survey respondents, 95.3% of whom are VP level or above, are allocating more dollars than ever to digital. These leaders expect to spend a full 54% of marketing budgets on digital within the next five years, up from 44% today.
In addition to dividing up your marketing budget by digital and traditional methods, you need to determine how much to allocate to each channel – web development, mobile, email marketing, digital campaigns, content marketing, social media, paid search and display, analytics, direct mail, brand collateral, sales tools, trade shows, etc.
To figure out what 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. Check out our recent post on Omnichannel Digital Marketing Attribution.
You’ll also need to factor in overhead costs of the marketing department such as marketing staff, training and the marketing tools/software you use.
But let’s back up and take this one step at a time.
Consider Your Revenue & New Customer Goals
First thing first – you have to set clear goals for revenue and new customer acquisition for next year. How much revenue do you want your department to generate? And how many new customers will you need in order to reach that goal?
To determine this number, you should consult with your board of directors, investors and marketing team to figure out what is reasonable – 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 much should we allocate to our marketing budget?” you should ask, “How much should we spend in order to acquire 100 new customers?”
To determine that number, you need to know…
What’s Your Average Cost Per Lead?
This is how much you spend to acquire a new customer.
Simply 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.
If you don’t know your cost per lead, the next best option is to look at what other similar companies are achieving.
For example, HubSpot reveals that leads generated via inbound marketing efforts (social media, web content, search engine optimization, etc.) cost an average of $135, while leads generated from traditional outbound methods (tradeshows, direct mail, telemarketing, etc.) cost an average of $346.
And according their 2017 Demand Generation Benchmarks Report, the average cost per lead across all of the companies surveyed is almost $200 ($198.44) – although this again varies widely per industry – with IT and tech companies paying an average of $369.88 per lead and non-profits paying an average of $43.46.
What’s Your Average Conversion Rate?
The next number to determine is the rate at which these leads actually convert and become paying customers.
For example, if you generate 1,000 new leads, but only 50 of those leads actually become new customers, then your average conversion rate is 5%.
The formula is: the number of conversions 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.
Again, if you don’t have access to internal data to help you determine an accurate average conversion rate for your company, you can research average conversion rates in your industry to guide your decision making.
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.
Calculate Your Annual Marketing Budget
Now that you have a good idea of how much a new lead costs you and your average conversion rate, it’s time to work through two quick calculations.
#1 – How Many Leads Do You Need?
First, determine the number of leads that your company needs in order to reach X new customers. You can do this 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%.
100 ÷ 0.1 = 1,000
That means, you need to generate at least 1,000 new leads in order to reach your goal of 100 new customers.
#2 – How Much Will That Cost You?
You can now determine how much it will cost in order to generate 1,000 new leads by multiplying your goal by the average cost per lead.
Again, let’s be optimistic here. After all, you’re a damn good marketer who maximizes every dollar, right? So, let’s imagine your average cost per lead is only $135.
1,000 x $135 = $135,000
That means, in order to get 100 new customers, your company should plan to spend at least $135,000 on marketing.
The Bottom Line
If you want to be strategic about your marketing budget, then you need to be laser-focused on two main statistics: conversion rates and cost per lead.
And if you want to maximize your annual marketing budget, then your mission should be to allocate your budget across marketing channels that achieve the best results in two areas:
- Increase conversion rates.
- Decrease cost per lead.
We’ve made this handy dandy worksheet that makes it easy to calculate your marketing budget using the formulas discussed above.
Need more help determining your budget or building a marketing strategy that really delivers? That’s what we do. Let’s talk.