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Setting Your Digital Marketing Budget

Digital Marketing Budget Formula

What should your digital marketing budget be? How much should you budget for advertising? You want to spend enough to achieve your digital marketing objectives, but don’t want to spend so much that you aren’t optimizing your profit.

Determining what you should spend on advertising and digital marketing is even tougher if you don’t have historical numbers for a basis, or experience with digital marketing budgeting. But it doesn’t stop there. Beyond the size of your budget, how much should you allocate to different activities?

Every business is different, but a number of general studies have been done that peg marketing budgets as a percentage of revenue. The Deloitte 2017 CMO Survey pegged spending at between 4% and 24% of revenue. Within that range, you’ll find huge variations in how that money is allocated and when it is spent.

Revenue Target Formula - Digital Marketing

What is your revenue target?

If you look around online, you can find downloadable spreadsheets that have turned the CMO survey data into a macro that automatically calculates benchmarks based on your type of company and your industry and your expected revenue. These tools can help you get started.  

Determining that revenue number might be difficult, particularly if you are a start-up. You may find it easier to work backwards. Instead of estimating the revenue you could make, estimate your expenses. That will tell you how much revenue you need to make. Plug that number in to the advertising budget formula and you are off.

You can fine tune the formula by estimating your revenue both conservatively and for if you enjoy extraordinary success. Consider details like the length of time you have been in business. You may already have good brand awareness so you can get away with spending less on brand building. You might be attracting steady online traffic, so that can free up funds for other activities. Whether you are in a B2B or B2C business also makes a difference. Consumer businesses need more mass outreach, where as B2B tends to be heavily dependent on in-person selling.

Advertising budget formula options

With your revenue number calculated, you are ready to set an advertising budget. Many agencies suggest spending 5 to 7 percent of gross sales on advertising, but that suggestion doesn’t account for your other costs. While none is exactly plug-in advertising budget formula, here are some other ways to calculate how much you should spend on advertising and how much to spend on marketing:

  • Calculate the funds available for marketing from your gross revenue. To do that, you need to deduct your costs of doing business. You have the cost of goods sold, cost of sales, rent, salaries, overhead, and potential variable costs. Deduct these from your total revenue and you will have your profit number. Then determine what percentage of profit you can spend on marketing. If you decide you can afford 10% of profits and you make $100,000 in profit every year, then your ad budget is $10,000. Some experts suggest spending 12 to 20 percent of profit on advertising for a new company. If you are established, you can likely bump that down to 6 to 12 percent.
  • If you sell a specific item or set of items, you can use the unit-of-sales method. Use your experience and industry averages as a guide to decide how much of the sales price you can spend on advertising. Say you can spend ten cents on advertising. Decide how many items you want to sell and multiply it by that ten cents. Selling 100,000 items with ten cents per item for advertising gives you a budget of $10,000.
  • Objective and task budgeting doesn’t start with a number. Instead, you work backward from what you want to achieve, determining the tasks to complete to get there with a budget for each. You figure out who you need to reach, how to reach them, and the cost for doing so. You add up the costs and then compare it to your profit margin. If you find you can’t afford that plan, you start shaving costs here and there until you have a adverting budget that fits your profit and revenue projections. As the year progresses, make adjustments up or down.

Allocating your advertising budget

Deciding how much to spend on specific advertising and marketing tactics is the next challenge. Your business, customers, and competitors will impact how much you spend on:

  • Social media marketing
  • Content marketing
  • Personalization
  • Video advertising
  • Lead generation and management
  • Marketing analytics and testing
  • Mobile marketing
  • Email marketing
  • Marketing automation
  • Search engine optimization
  • Webinars and virtual events
  • Display advertising
  • Sales enablement
  • Paid search
  • Affiliate marketing
  • Print
  • Radio
  • Television
  • Direct mail
  • Outdoor

Research done by Forrester and eMarketer show that the average company spends 42% of the advertising budget on digital marketing tactics. That number is expected to grow 45% over the next two years. Back in 2014, it was only 29%. Breaking out that digital spend, search engine marketing garnered the biggest share, followed by social media advertising. Online video is growing at a huge rate.

For most start-ups, digital marketing will give you the biggest bang for the buck. Some tactics are free and most are low-cost or at least have controllable costs that start with pennies on the dollar. The barriers to entry for you to get started are low. We invite you to explore our library of how-to videos [list links]

There is no one-size-fits all advertising budget formula or pre-packaged way to set your digital marketing budget. With these formulas, you can set benchmarks and understand basic spending expectations. From there, it is a matter of testing what works and optimizing your tactics and your spending based on results.

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