Digital Marketing Budgets: Establishing Investment Frameworks For Predictable Returns
13 minute read
The 2020 COVID-19 pandemic caused unprecedented disruption to business by wreaking havoc with plans and budgets. On the upside, it also uncovered existing and long-standing marketing issues that have been affecting companies long before an epidemic came along.
It exposed the reality that some companies have been blindly investing money into both digital and traditional marketing, with no data-backed correlation between the budgets set and the objectives required.
This should not be the case for digital marketing, which readily gives you both historical and real-time data.
So how do we establish, plan, and execute a results-driven digital marketing strategy with predictable results against a defined budget?
This guide has been designed to help you set realistic and data-backed budgets. You will learn how to build an achievable strategy with quantifiable results, giving you a greater likelihood of reaching your business objectives.
It has been developed for CEOs, business owners, or marketing managers who are looking to launch digital marketing campaigns but can’t quite work out what budget they need to get the results they want.
Throughout, we will demonstrate the importance of:
developing a digital marketing budget to plan marketing expenditure
enabling ROI analysis
allowing for contingency
continual optimisation for peak performance.
What’s the problem?
We’ve noticed that that it’s common for owners, CEOs, and managers to set digital marketing budgets independently of the results they want. For example, they will come to us and say, “We want 20 leads a week, and we have a monthly advertising budget of $2,000”. They’ve pulled these numbers out of the air with no hard data to back them up. Ideally, they should have set their budgets based upon realistic estimates of what’s required to achieve their desired outcome.
This type of ‘guestimation’ is problematic for a number of reasons:
Without budgets set up front, there’s no ability to judge efficacy relative to expectations.
If budgets aren’t tied to outcomes, marketing is often set up to fail, and unfairly seen as purely a cost centre.
There is usually lost or missed opportunity as a result of under-investment in digital marketing.
Insufficient budgeting often results in an inability to recommend upwards that budgets be maintained or increased to hit targets, using data as evidence.
Over investment in traditional media makes it almost impossible for a company to pivot quickly based on performance and market conditions, restricting the results it could receive.
The wrong promotional budgets are incorrectly expected to act as leverage on the fixed costs of marketing. For example, a $20,000 annual marketing budget is expected to recover $200,000 in annual staff costs and a $50,000 new website.
Why does this matter?
Marketing has the potential to be a tremendous engine of growth for organisations. But to achieve that, you must give it the fuel it needs to thrive. Resources are scarce and money is valuable. Marketing gives you the ability to turn one dollar into two but needs a framework to do this reliably.
You also need a framework to know when to identify that adding more fuel – time, money, resources – will boost results. Conversely, you need to have the discipline to save that fuel for tomorrow if required; to know when the flame has already gone out and it’s time to look at a new path. By providing management with easy-to-decipher decision-making frameworks, it allows them to make quick decisions to help you to achieve outcomes.
Established frameworks are critical in allowing companies to make fast, effective decisions – an important success factor of the modern enterprise.
What’s the solution?
The solution is simple – set digital marketing budgets to establish an investment framework for predictable returns. This allows your business to know exactly how much money to spend to successfully achieve your objectives.
If you search “how to set a digital marketing budget” on Google you’ll get a plethora of results that say to base your budget on a percentage of revenue. But this isn’t always realistic. There is no one rule of thumb that you can apply to all businesses.
Marketing budgets are unique to your circumstances. They may vary considerably according to your objective, whether this is a percentage of market share, sales volume, increased profit margin, or share of customer in a highly competitive market.
You need to set a budget based on expected returns.
Measurable figures are the key. It’s important to have tested and accurate data to establish a Cost Per Acquisition (CPA).
Once you calculate a baseline acceptable CPA, you can set your total marketing budget to match supply and demand expectations.
Return On Investment (ROI) and Return On Ad Spend (ROAS) helps you choose your marketing channels and budget allocations.
Accurate tracking and analysis can then work to drive the CPA down.
It’s important to note that sometimes digital marketing budgets might have to be based upon what you can afford, and nothing else. If this is the unescapable reality, then we recommend working to allocate that budget as effectively as possible. Remember, however, that there is always a way to find the money to achieve an objective if the prize is big enough and the likelihood of success is great.
Implementing your solution
Your overall marketing budget is multi-faceted and all-encompassing. For a large business, it may contain everything from strategic marketing, branding, events, merchandise and sales collateral, all the way through to print advertising, public relations, and digital marketing.
With this many functions to cover, it’s easy to randomly allocate budgets, with the expectation for digital marketing to still meet certain objectives. The key is to use data to set processes and frameworks, allowing you to confidently understand how much you need to spend on your digital marketing in order to achieve the results you want.
Note that the budgets mentioned here are for advertising spend only, and don’t include engaging digital marketing agencies who can help drive results, or any marketing software and tools you may need to use.
Let’s look at the different steps in correctly planning the digital marketing budget that’s right for YOUR business.
Step 1: Establish Current Position
To be able to make data-backed decisions, you first need to understand what your current position is. This is done by collecting all historical data for your business and past traditional and digital marketing activities.
Understand and document metrics over specific time frames, such as:
Current customer acquisition channels, including paid and organic traffic through the website, word-of-mouth referrals, trade shows, walk-ins, and more. If you’ve tried different channels in the past and they didn’t work, make sure to include these too.
Historical sales numbers – customers and revenue – in total and per channel.
Historical conversion numbers, such as website form submissions or phone calls, in total and per channel.
The key conversion and performance metrics (CPA, ROAS, Cost Per Click, etc) for:
specific channels over set time frames
specific campaigns, promotional vs non-promotional.
Average Conversion Value and Customer Life-Time Value (CLTV).
Historical conversion rates from first contact, such as website form submission, through to final conversion.
The value of different conversions achieved, for example, a 30 minute phone enquiry might have a higher likelihood of converting than a contact form.
Make sure you consider seasonality and other market factors when analysing your past data, and measure timeframes that are relative to your business objectives.
Step 2: Identify Your Desired Position
As with any objective and goal-setting exercises, you need to be realistic about what you can achieve. It’s great to shoot for the moon but trying to achieve everything at once will spread you too thin when it comes to implementation.
First, define your marketing objectives. To be successful, these need to clearly work towards your stated business objectives. You will use them to establish your ‘strategic intent’ – “the provision of a powerful long-term direction with particular emphasis on moving beyond the constraints imposed by current resources and capabilities.” Researchgate
By taking a top-down approach here you can gauge what is possible and realistic in market demand and internal supply. Given the competitive environment and your capacity, what slice of the pie can you realistically aim for?
Research market demand to establish realistic market share. Use online tools like Google Keyword Planner and Google Trends to understand search volume for:
key terms related to your objectives
competitiveness around the search terms
cost per clicks around keywords
what similar searches your target market is performing.
Establish internal supply capability for maximum output. How many staff and how many hours can you put towards managing digital marketing activities? How can you ensure that time spent on this generates the best results? Does it involve upskilling the team or hiring a digital marketing agency?
Establish desired and realistic conversions within set timeframes based on this data.
By researching market demand and taking stock of internal resources, you can easily understand opportunities as well as the benefits of capitalising on them and going hard with your digital marketing strategy.
Step 3: Establish your digital marketing objectives
Step 1 has provided some base results against costs to implement. Step 2 has given you a good idea of what you can realistically aim for. Now it’s time to work out exactly what figures you want to achieve from your digital marketing. To do this, work backwards, looking at the bigger picture then narrowing it down to specific numbers.
How much revenue will you need to generate through digital marketing to hit your business and marketing objectives?
How many clients will you need to obtain to get this revenue (revenue divided by average customer lifetime value)?
How many conversions will you need to get in order to hit your desired number of clients (number of clients divided by conversion rates from first contact to final conversion)?
What is an acceptable overall CPA for each conversion from digital marketing? If you haven’t historically run digital marketing, make a solid assumption using data from Google Keyword Planner combined with industry data around conversion rates
Step 4: Determine budgets and distribution
Now is the time to use your data to calculate how to achieve your desired results and what marketing mix has the best CPA.
Again, you are going to reverse engineer the budget required by working your way backwards from the end goal. Don’t start from the beginning and hope and pray you end up in the right place.
Calculate how many conversions you need to generate each year to hit your client and revenue objectives.
Break this down into monthly targets.
Multiply your digital marketing CPA by the number of conversions needed to get the monthly required ad spend.
Let’s use the following as an example.
You’ve worked out from step 3 that you need to generate 200 conversions – contact form submissions – to meet your objective of 50 new clients a year to hit your revenue target. This is based on a 25% conversion rate from contact form submission to client.
Breaking this down monthly, that’s roughly 20 form submissions to get 5 new clients a month, rounded up from 4.12.
If your average digital marketing CPA based on your historical data is $500 to generate each contact form enquiry, then a good baseline estimate is that it will cost $10,000 per month in digital marketing budget to meet your objectives.
If possible, consider the varying CPAs for each channel in your digital marketing mix and use market forecasting or scenario planning to work out the ideal ad spend for each channel to hit your revenue objectives.
Looking at this at a channel level instead of a total digital marketing level can mean the difference in hundreds of thousands of dollars of revenue by reducing the risk of inaccuracy. You will get more bang for your buck by bringing down total CPAs through smart budget channel allocation.
Make sure that your budget:
has granularity, comprised of line items that explain each cost
is well diversified across different channels
is focused on weighting the resources towards areas that will generate the highest return
has a timeline, with budgets set for a certain time, usually monthly, before re-evaluation
is adaptable and flexible, able to pivot in response to changed circumstances
It’s important to note that a budget for the next few months will be more granular than a budget for the next 12-24 months.
What if you haven’t run digital marketing before?
Just because you don’t have historical company data on past online marketing efforts, doesn’t mean you need to fly blind. Google Keyword Planner and similar tools are great at providing an estimate on how many conversions you can expect to receive based on marketing budgets and maximum Cost per Clicks, and you can draw assumptions from industry research.
Note: You will need to create a Google Ads account to access this free tool.
Using Google Keyword Planner for budget and conversion forecasting
Based on this, you can work out an average CPA to determine your marketing budget for the month, then run experiments to gain a clear understanding of what type of CPCs, CPAs, ROAS, and similar you can expect from each channel. As you start to see consistent trends in the results, you can plug these numbers into your marketing budget plan to make data-backed decisions around the best budget allocation for the highest revenue at the lowest CPA.
Step 5: Optimise for desired results
Unlike some traditional marketing activities, this is not a set-and-forget exercise. Once running, digital channels and their real-time data provide the opportunity to continually test and tweak against expected results. Evaluate the budget you’ve estimated in Step 3 against actual data you are receiving and use this as a tool for making decisions. If the budget is showing that channel A is performing better than channel B – higher conversions at a lower CPA – then adjust the budget allocation. If results show that the current mix is generating a strong ROI, then consider pushing for an immediate budget increase in the absence of other constraints.
Companies need to be using frameworks to enable them to confidently spend large sums of money to generate even greater returns. It makes sense to capitalise on data that shows you what results you can generate for different levels of ad spend.
To ensure you keep on track, and continually improve your results, follow our top tips below.
Continue running experiments throughout the campaign to get a clear understanding of the performance of key metrics such as CPCs and CPAs.
Test new platforms and channels and run them for an appropriate amount of time before determining if they will be suitable.
Be sure to look at assisted conversions when evaluating performance. At a glance, it may appear that some channels are underperforming, but if you look at attribution paths, they may actually be playing a crucial role in nurturing prospects into taking conversion action down the line.
Eliminate channels with a CPA considerably higher than average unless they are required to support performing channels.
Consider revisiting channels regularly as they update their functionality and improve their advertising abilities – just because they didn’t work in the past, doesn’t mean they won’t work now.
Conduct scenario planning to predict revenue and customers using the CPAs for each platform.
Most importantly, throughout your campaign regularly assess expectations versus reality, set new objectives, and adjust budgets to ensure continual success.
By following these frameworks, you’re able to confidently predict revenue and sales in direct response to the amount of money you put behind your digital marketing. This comes with a host of additional benefits to you and your company.
Digital marketing budget case study
A local company, ACME Corporation (not their real name) recently came to us for help in establishing a digital marketing budget.
The business was currently receiving leads from a national company, who would charge 50% of the order value. So, for an average order value of $100, ACME Corporation would receive only $50 of this to supply and service the order.
We evaluated various channels against their desired outcomes and spend ability.
Below we show how we devised a realistic budget to achieve the desired outcomes on the Google Ads channel.
We used Google Ads forecasting to work out an optimum advertising budget by:
Undertaking extensive keyword research to build up a comprehensive list in Google Keyword Planner of high value keywords.
Setting up some campaign plan guidelines like limiting the search volume area to a specific geographic area, and the time frame to February, the busiest month of the year for this type of industry.
Testing a number of ad spend budgets and benchmark Click Through Rates to find the point at which returns were diminished.
We were then able to confidently advise the client how much to spend on Google Ads to maximise the direct sales potential at an average CPA of $31. This meant a considerable saving through circumventing the $50 referral fee they were paying originally.
We then provided some additional modelling using theoretical additional flow-on conversions, such as users subscribing to databases and reordering down the track, as well as word of mouth referrals. This established some lifetime ROIs for the ad spend.
The revenue forecast and ROI analysis for ACME Corporation’s Google Ads campaign
What are the benefits?
The ability to predict and control marketing results is a relatively new phenomenon borne from the tracking and analysis of big data and digital marketing. This ability allows for:
speed of decision making
reduced stress and anxiety of having a plan in place
enough budget to meet objectives
ability to continually update forecasts using budgets to evaluate objectives relative to actuals and assess trend-to-date versus expectations
increased ability to raise capital if required – investors like to see numbers backing results
increased ability to confidently apply debt leverage if required – if you know that the money you can borrow is likely to generate an attractive return, then applying debt leverage can be a wise investment
ease of reporting and proof of results
ability to confidently predict outcomes of budget increases or decreases.
At best, not setting the correct marketing budgets can lead to unwelcome surprises and at worst, can set you up to fail.
Establishing a framework for predictable returns allows management to make fast decisions to achieve your outcomes. It can help with budget and income planning, as well as upcoming strategy based on real data.
The five steps to implement the framework are:
Establish current position
Identify desired position
Establish your digital marketing objectives
Determine budgets and distribution
Optimise for desired results
What should you do?
One of the things that sets Living Online apart is that we take a management consulting style approach to digital marketing. Articulating the financial nuances of budget planning and explaining how this can drive operational outcomes is key to our unique selling proposition.
When we work with clients to determine the optimal digital marketing budget to achieve their goals, we don’t pull numbers out of a hat. We use real data to recommend the right budgets are put in place for the returns you require.
Our experience in establishing and managing results-driven marketing budgets ranges from small local businesses through to international organisations.