How to Manage Your Startup Marketing Budget
Startup budgeting is like taking a wild stab in the dark, yet it’s something businesses can’t gloss over if they want to succeed. No matter what stage the business is in, or how brilliant its product or service is, a crucial part of a small business’ expenditure is its marketing budget. How else will new customers discover the business?
Thinking of all the money you need to spend can be disconcerting when the business hasn’t begun making consistent revenue. Rather than thinking of marketing costs as an expense, it should be considered an investment—spending that will result in a quantifiable benefit in the future. The adage “you need to spend money to make money” couldn’t be more true for a startup.
Not sure where to start? There are steps you can take to make sure your startup's budgeting process and spend management is as effective as possible.
Create a marketing budget
As a CMO, it is important that you are allocated a sensible budget that will allow you to achieve your marketing goals. While there is no hard and fast rule on setting the marketing budget, the suggested way is to take a percentage of actual or projected gross revenue. The percentage you apply will depend on the business’ size and age and what industry it operates in.
Startups need to invest more in marketing efforts until market share is established. During this brand-building phase, you can expect to spend up to 20% of revenue on marketing efforts to gain traction. Once the business is operational and generating sales, the U.S. Small Business Administration recommends budgeting 7-8% of gross revenue for marketing expenses. This guideline assumes the business’ revenue is under $5 million, and its net profit margins are between 10% to 20%.
There are other factors that will influence how much your business spends on marketing. Your marketing budget is likely to fluctuate according to the current environment. According to the June 2020 U.S. CMO Survey, marketing budgets have risen to 11.4% of revenue, up from 8.6% before the COVID-19 pandemic. This likely reflects a prioritization of marketing strategies to maintain brand awareness and customer retention throughout this challenging economic period.
Marketing spend also varies across industries. From a CMO survey conducted in February 2020, companies in banking, technology, and communications industries spent the most on marketing as a percentage of revenue, while mining and construction, transportation, and manufacturing spent the least. We recommend reaching out to other CMOs to get a sense of appropriate benchmarks for a startup in your industry.
Now let's think about the phasing of your budget throughout the year, which will be impacted by your sales cycle and seasonality of sales.
- Sales cycle: It's important to remember that marketing spend today will not mean increased revenue next week or even next month, particularly if the business operates B2B. Any leads created from marketing efforts will take time to be processed and vetted as a qualified sales opportunity, then it’s up to your rockstar sales team to close the opportunity. This marketing and sales life cycle differs from business to business; however, it takes about six months to complete on average and will need to be factored into the budget.
- Seasonality: Does the business experience a spike before the end of the fiscal year or during the holiday period? Perhaps you see a boost during the back to school rush or the change in seasons. Rather than distributing your budget equally throughout the year, you may want to allocate more to the months just prior to your peak sales periods.
Break down your marketing budget into meaningful categories
Now that you have an overall figure to work with, it’s time to break your budget into key categories you’ll need to spend on, aligned with your marketing plan. To start, think of the types of campaigns you’ll be running and the platforms and assets you’ll need to get them done.
Apart from your marketing team, factor in the cost of recruiting, onboarding, training, and remunerating sales consultants. Your labor budget could also include hiring freelancers or contractors, which will allow you to scale up flexibly during peak periods.
This category encompasses all the systems and tools you’ll need on a day-to-day basis. This may include marketing automation tools, social media platforms, and scheduling tools (including Facebook, Instagram, and LinkedIn), video conferencing and webinar software, an email marketing platform subscription, graphic design software, and website set-up and maintenance costs.
Branding & Design
You’ll need to create assets to establish a unique first impression in your customer’s mind—from logo design and visual identity to brand positioning and story, business cards, sales collateral, infographics, and website design.
This may include conducting market research, establishing product positioning and messaging, gathering customer feedback, and creating a go-to-market strategy.
Content Marketing & Search Engine Optimization
Allocate budget for the design and creation of content to be delivered, including blog posts, case studies, videos, and images. You may also need to engage SEO consultants and utilize SEO optimization tools.
Include ample budget for social media ads, blogger outreach, Pay Per Click (PPC) advertising on Google, Google adwords, display, and retargeting ads. Although most paid ads are now in the form of digital marketing, if relevant for your business, you may want to carve out a section for traditional advertising channels such as print, direct mail, billboards, transport advertising, TV, and radio ads.
Consider whether you’ll spend on PR placements, press releases, and award submissions.
Factor in attendance at trade shows and exhibitions, networking events, sponsorship of events, or perhaps promoting and hosting your own events.
Inevitably, there will always be other costs and unforeseen expenses. This might include travel expenses, gifts and samples, and client entertainment expenses.
Step 3: Regularly track your budget to actual
You’ve set a budget, and you’ve decided how you’re going to spend the money—kudos! The planning process itself is invaluable in creating a financial roadmap for your team. Still, if you don’t regularly track your spending to budget, it’s easy to lose focus on your overall objectives. By closely monitoring your marketing spend, you’ll know exactly how much budget you have available to spend at all times. This way, you’ll be able to avoid overspending, or even underspending and wasting allocated budget.
Now, how do you track your forecast budget to actual spending? Tracking spend on marketing activities can be challenging, especially if you need to rely on the finance team to provide spending reports. You’ll most likely be twiddling your thumbs for anywhere from 3 days to 3 weeks after month-end, due to their lengthy financial close process, or maybe even longer if they’re still chasing your team for missing expense receipts.
So what’s the best way to do it? Here is a summary of our best practices:
Create a budget to actual tracker
Create a month by month tracker to show key categories broken down into line items, budget allocation for each category, actual spend for each category, and a cumulative total. Here is a useful template from Hubspot.
Track it yourself
As a CMO, it’s your responsibility to keep the marketing budget in check. Your best chance of doing this is by tracking spending yourself rather than relying on Finance’s delayed reports. By monitoring regularly, you’ll be able to use up to date data to make evidence-based decisions to adjust the marketing strategy.
Communicate with Finance
It’s important to reconcile your budget to actual with Finance, to make sure you are on the same page. Marketing spend is often spread across business units and teams, across different periods and geographies. So accurate tracking, classification, and accounting for marketing spend is essential to create a clear picture of marketing spend.
Aim to set up three meetings with your finance team each month to track and adjust your budget if necessary:
- Beginning of the month: compare your spend from last month to the expected budget for this month.
- Mid-month: check in with Finance and seek advice on any unusual categories that may need to be accounted for differently.
- End of month: review expenses and all invoices to make sure both teams have the same information.
Don’t be alarmed if there are differences between your figures and those calculated by Finance. There will be discrepancies due to accounting rules that aren’t intuitive to those not in the field. For example, software costs may be split across teams, or amortized instead of expensed. Keep in mind that Finance works on an accrual-based accounting method, where revenue and expenses are recorded when a transaction occurs rather than when the payment is received or made. For example, if you sign a contract with a freelancer this month but pay them at the end of their contract next month, you need to report it as an expense this month when their work commences rather than when you make the payment.
Track spend vs. performance
When you closely track your spending against your actual performance, you can gain insights into what marketing efforts are working well and which are not. This detailed analysis will help you identify which marketing tactics are performing, which need to be tweaked, which aren’t working for your business at all. You’ll need to carefully track spend to ensure your Return On Investment figure is accurate when assessing your marketing campaigns’ returns.
Review and adjust your budget
It’s expected that your first budget will be inaccurate—but you can learn and make adjustments along the way. The very nature of a startup is a rollercoaster of unpredictable roadblocks and unexpected opportunities. You’ll have to roll with these and adjust your budget accordingly.
It’s crucial to track spend on a regular basis so you can adjust spending mid-month or seek the necessary approvals for any additional spend required for the remaining period. Make sure to keep a close eye on categories that easily run over budget, including digital ad spend, contractor hours, and events. Also, be mindful of hard to track expenses, such as pre-paid software and non-monthly invoices that need to be allocated across months accordingly.