How Much Should A Startup Spend On Marketing?
For a startup, deciding how much to spend on marketing can be extremely difficult. Established companies have the luxury of knowing a great deal about the lifetime value of their customers, the average costs to acquire those customers, and how much market share they have and/or want to achieve. All of these can be plugged into a spreadsheet which can output a sensible marketing budget for the next year.
However, a startup will often not have access to some or all of that data. Therefore deciding how much to spend can involve a lot of guesswork. If you overspend, you’ll use up valuable capital that could be going to product development. If you underspend, you may not grow fast enough to reach profitability or demonstrate the growth you need for further raises.
What is a marketing budget?
First off, it would be helpful to define what a marketing budget is. The word marketing itself is a little vague and can include a lot of different functions, from pricing and promotions to digital asset creation and website building.
We would recommend that your marketing budget includes every cost associated with promoting your business that is not direct sales. That should include website creation, SEO, social media, agency/freelancer retainers, staff costs, media spend, creative/asset production, PR and customer relationship management (CRM).
Marketing Budget as a Percentage Of Revenue
Some business books will recommend a young company (up to 5 years old) should 20-25% of its budget on marketing. For more established companies, they’ll recommend 10-15% depending on strategic targets. But if you look elsewhere, you’ll see very different percentages – for example, the US Small Business Administration recommends spending 7-5% of revenue on marketing if your total revenue is less than $5m dollars.
That’s a pretty wide margin. How do you pick which percentage to go for?
And what if you’re pre-revenue? You can apply your chosen percentage to your projected revenue from your business plan. But you’re in dangerous territory there – your projected revenue was likely built on some big assumptions, so if you do this you’re applying an arbitrary percentage to an arbitrary revenue figure – the result could be a marketing budget that is wildly out from what real world conditions require.
And what if you have ambitious growth targets you need to hit? Or your competitors are spending far more or less than those percentages? This one-size-fits-all approach then begins to fall apart quite quickly.
Test and learn
One thing we recommend to clients unsure of what to spend is a test and learn approach. Choose one or two channels and assign a disposable testing budget to test on them. This should be small enough that you won’t desperately miss the money if the test fails, but large enough that you can collect enough data to learn from. It really varies per industry, but circa £1.5-2k per month per channel is a good starting point.
If you run three months of proper tests, this should give you far more idea of what your customers are worth, and how much they might cost to acquire them. It’s very important you execute these tests properly to avoid false negatives. For that reason, it’s often best to use specialist consultants rather than a generalist marketer.
If you’ve run these tests well, by the end you should be left with a decent idea of:
- Your average customer acquisition cost (CAC). Even if it’s not a fair average, you’ll have enough info to know what an achievable CAC might be.
- Your average customer lifetime value (LTV). This is the total profit a customer will deliver to you over their lifetime. After some initial tests you should have a better idea of customer order value and behaviour, and make an estimate for LTV.
Armed with these two bits of information, you’ll be able to calculate, rather than guess, a marketing budget.
How to calculate your marketing budget
You’re in luck! We built a marketing budget calculator for exactly this purpose.
With your LTV, CAC and revenue targets you can calculate what your marketing budget should be. We have written about how to calculate your marketing budget here. The general idea is:
- Calculate your projected LTV:CAC ratio.
- Define your growth targets. For example, you might say you want to acquire 50 customers in 24 months.
- Calculate your CAC budget – how much you need to spend to acquire your target number of customers.
- Calculate your loaded marketing budget – this is the cost to acquire customers in terms of channel spend, plus your other marketing costs like salaries. As a rule of thumb, we say double your CAC budget to get an idea of your loaded marketing budget.
- Calculate your monthly marketing budget – divide your loaded marketing budget by your timeframe – 24 months in our above example.
How do I get the most out of my marketing budget?
Now, this is a big question. For a marketing budget to be effective you’ll need:
- A solid, well researched strategy. Who you’re targeting, where you’re going to target them, and what your proposition is to them.
- A good channel mix. You need to choose marketing channels that are relevant to your customers without spreading yourself too thin.
- A thorough process of experimentation. You’ll need to be scientific with how you approach marketing tests.
- A great team. You’ll need to be working with expert marketers and channel specialists who can get the most out of the spend allocated to them.
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