Cost and budget
How to set a marketing budget from your own numbers
Published by Zubair Afzal, responsible editor
First published Updated 8 min read
A percentage-of-revenue budget tells you what you can afford to lose. Your unit economics tell you what you can afford to spend. Only the second is about growth.
Percentage rules are popular because they’re easy to agree in a meeting. But they look backwards, ignore margin, and treat a two-week sales cycle the same as a two-year one.
The method below takes six steps and about an hour. The US Small Business Administration advises putting a complete breakdown of costs in your marketing plan and comparing marketing costs with the revenue they bring in. This method does that, and gives a number you can explain line by line.
The sums
The four numbers that drive a marketing budget
This is the whole method in one line. Every figure comes from your own business. None of them is a benchmark borrowed from someone else.
- First-order revenue
- What an average customer spends on their first job, taken from your own invoices. Avoid going on gut feel.
- Gross margin
- The share you keep. A budget built on revenue you never kept is built on money that was never yours.
- Share you’ll spend
- How much of that profit you’ll spend to win a customer. Perhaps a third, if you fund growth from cash flow.
- Customers needed
- New customers needed, after taking off the repeat and referral business you’d win anyway.
The method
Six steps to set a marketing budget
Every number in the example below is made up to show the sums. Replace them all with your own before you draw any conclusion.
Start with what a customer is worth
Take the average revenue from a customer's first order and, separately, a realistic figure for their lifetime revenue. Placeholder example: a customer spends £4,000 on their first job and £9,000 over three years.
You get: First-order value and lifetime value, stated separately
Turn revenue into profit per customer
Apply your gross margin, because you can’t spend revenue you never keep. Continuing the placeholder example: at a 40 per cent gross margin, £4,000 of first-order revenue leaves £1,600.
You get: Profit (contribution) per customer
Set the most you’ll pay to win a customer
Choose what share of that profit you’ll spend to win a customer. A business funding growth from cash flow might allow a third. One with investors behind it might allow all of it. In the example, a third of £1,600 gives a maximum of roughly £530 per customer.
You get: A ceiling on cost per customer
Work back to a cost per enquiry
Multiply that maximum by your close rate. Placeholder: if you win one enquiry in five, £530 per customer means about £106 per enquiry is the most you can pay. This number tells you whether a channel can work before you test it.
You get: A maximum cost per enquiry
Multiply by the customers you need
Take your growth target and subtract what repeat and referral business will bring; the rest is how many customers marketing has to win. Placeholder: 60 new customers at £530 each gives roughly £31,800 a year. That’s your ceiling, not a recommendation to spend it all.
You get: A budget figure with the sums attached
Check it against cash, capacity and demand
Can you fund the gap until customers pay back? Can you serve sixty more customers? Is there enough demand in your market to reach sixty? A budget that fails any one of these just wastes money efficiently.
You get: A number you can fund, serve and reach
What you need
What do you need before you start? Seven figures
These don’t need to be precise, but they need to be yours. A rough number from your last fifty customers beats an exact-looking benchmark from someone else's business.
- Average first-order revenue per customer, from your own invoices.
- Realistic lifetime revenue, based on how often customers have come back. Hopeful guesses don’t count.
- Gross margin, so the budget is built on money you keep.
- Close rate from enquiry to customer, counted from your last fifty enquiries.
- How many new customers you need, after taking off repeat and referral business.
- Payback period: how many months between spending the money and earning it back from a customer.
- Follow-up capacity: how many enquiries a week your team can answer properly.
Three common ways to set a marketing budget, compared
The first two are common advice. Only the third holds up when a finance director goes through it line by line.
| Dimension | How it works | What it ignores | When it makes sense |
|---|---|---|---|
| Percentage of revenue | Take last year's revenue and set aside a share of it. | Margin, close rate, sales cycle, repeat business, and whether the demand exists at all. | As a sense check on a number you worked out properly. Never as the method itself. |
| Match the competition | Estimate what rivals spend and spend about the same. | Their margins, customer values, close rates and funding are almost certainly different from yours. | Rarely. It can show what it costs to compete in a market. It makes a poor target. |
| Unit economics | Work out the most you can pay per customer from your profit, then multiply by the customers you need. | Nothing in the method itself. It does depend on accurate figures and on the demand being there. | Almost always. It is the only one of the three you can defend line by line. |
The main limit
How long until a customer pays you back?
The payback period usually sets your limit. The method above gives you a ceiling; whether you can spend up to it depends on how long a customer takes to pay you back, and how much cash you can put in until then.
Say a customer takes nine months to repay what it cost to win them, and you can only fund three months of that gap. Then your bank balance sets your budget, whatever the sums say. Pick a channel that pays back faster, even at a higher cost per customer.
Payback also explains many channel choices. A business that picks paid search over SEO is often making a decision about cash, not saying ads work better.
Watch for two traps. Spending against lifetime value with first-order cash is the fastest way to run a growing business out of money. And leaving the website and follow-up out of the marketing budget means paying to send enquiries somewhere that loses them.
What goes wrong
Three ways a well-sized budget still fails
- Enquiries arrive and nobody answers them.
- The most expensive mistake in marketing is a lead you paid for and never called back. Once you pass your follow-up limit, extra budget only produces a longer list of ignored enquiries.
- The spend is right but the website loses the enquiries.
- A budget aimed at a website that doesn’t convert only proves that the website doesn’t convert. If your enquiry rate is poor, fixing it is a cheaper way to grow than buying more visitors, and it improves every channel at once.
- The market is smaller than the target.
- Sometimes the sums say you need sixty new customers and only thirty are realistically within reach. That’s a finding about your strategy, pointing to new markets, new services or a higher average order value. More spend won’t help.
Questions
Marketing budget: common questions
What percentage of revenue should I spend on marketing?
No single percentage fits every business, so treat any "industry standard" figure with caution. A percentage rule ignores four things that decide what you can afford: your gross margin, your sales cycle, your close rate and how much of your revenue comes from repeat customers.
Percentage rules are still common advice. Canada's Business Development Bank (BDC), for example, suggests starting from a share of revenue and checking what your industry and competitors spend. Use that as a sense check, and work out the real number from your own figures with the method on this page.
Should I budget against first-order value or lifetime value?
Whichever your cash can survive. Spending against lifetime value is often right, but it means paying today for revenue that arrives over years, and you have to fund that gap.
Work out both. Spend against first-order value while you learn what converts, and move towards lifetime value once you have real data on how many customers come back.
What limits how much I should spend?
Three things: how long a customer takes to pay back compared with the cash you have, how many new customers you can serve, and how much demand exists in your market.
Money is rarely the tightest limit; time to follow up usually is. Spend past that point and your budget turns into unanswered enquiries.
Does the marketing budget include the website?
Yes, it should. Most enquiries are won or lost on the website. Treat it as a separate project and you can end up paying for traffic to a page that doesn’t convert.
The same goes for follow-up: response time, your CRM and whoever handles enquiries. Budget for the whole path from search to signed customer.
How do I set a budget when I don’t know my close rate?
Estimate it from your last fifty enquiries: count how many became customers, and use that. A rough figure from your own data is far more useful than a benchmark from someone else's business.
Then set up tracking so you have a real number within three months. Treat your first budget as a best guess and base the second one on evidence.
What if the numbers say the budget is unaffordable?
That is a useful result, and it usually points to the business model more than the marketing. If no realistic cost per customer works, the problem is margin, price, close rate or retention, and more spend won’t fix it.
It’s far cheaper to find this out on a spreadsheet than after a year of campaigns. Raising your close rate or average order value often makes a budget workable sooner than hunting for a cheaper channel.
References
Sources for how to set a marketing budget
The official documents and research this page is based on. Platform rules change, so check the source before you act on a detail.
Related
Keep reading on how to set a marketing budget
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