(Note: Our blogs are not written by GenAI).
The annual marketing budget ask is a major opportunity for the CMO to position Marketing as a growth engine, not a cost center as many C-suite colleagues believe. CMO should make the budget an investment thesis aligned with company’s strategic goals. It should reflect how marketing investment contribute to revenues, retention, and ROI.
We examined how to tie marketing objectives with company’s strategic goals in a previous blog on Annual Planning. This connection is crucial while building the Budget details. Your budget should become your growth portfolio with each of its major components ties them to impact, outcomes, and alignment with business goals.
Estimating Budget Size: Four Core Models
There are two major approaches for budget formulation – top down and bottom up. We will discuss two models each category. It is a good practice to use one model from each approach for your budget formulation – that way it combines top-down guardrails and bottom-up justification.
Top-Down Models
Percentage of Revenue: This is a commonly used benchmark approach. The rough distribution is as follows – Startups: 15-20%, Growth-stage companies: 10-15%, and mature firms: 5-10%. (Check Alloc AI Strategist for exact proportion for your company!)
Competitive Parity: Align spend with competitors to maintain Share Of Voice. This method should be used sparingly and only with full support from CEO & CFO. This model is applicable when keeping up with competition is the paramount consideration.
Bottom-Up Models
Objective and Task: Built from SMART goals (Specific, Measurable, Achievable, Relevant, and Time-bound). Calculate what each initiative will cost and sum them up. Ideal for growth-stage firms.
Zero-Based Budgeting (ZBB): With this model, each quarter is brand new! Start from zero and justify every dollar to be spent in the quarter. This is increasingly adopted in mature companies which have become too complacent in spending. The drawbacks with this model is that analyses and presentations take away time from the real marketing efforts and there will be resistance from team members.
The most used combination in most companies is “Percentage of Revenue” and “Objective and Task”.
Allocating Investments Strategically
Once you know how much to invest, the next challenge is where to invest. One commonly used framework is the “Three Pillars of Growth”:
- Acquisition: for new customer growth. The proportions corresponding to company sizes tend to be – Startup: 60%, Growth: 40%, Mature: 30%
- Branding: for long-term value. The proportions are – Startup: 30%, Growth: 40%, Mature: 30%
- Retention: to keep customers around. Especially important in SaaS and subscription businesses. The proportions are – Startup: 10%, Growth: 20%, Mature: 40%
Balancing Proven Winners with Strategic Bets
To foster innovation while managing risk, many marketing organizations adopt the 70-20-10 rule for budget allocation. Think of these as buckets under each of the three pillars discussed above.
- 70% on proven channels, such as paid search, emails, SEO, events, etc.
- 20% on emerging channels, such as new social media
- 10% on experiments on new, sometimes high-risk ideas such as new channels and technology.
Provide periodic updates on results from emerging channels and new experiments. This will convey to C-suite that your efforts are dynamic and open to new ideas.
Avoid the “Set it and Forget it” Trap
Statis budgets (in terms of overall amounts and its allocations) should be avoided at all costs. The market conditions always shift and channels fatigue. Static budgets also convey a lack of dynamism to both C-suite and to your team. This results in extreme makeovers like “Zero-based budgeting” discussed above.
Rather, CMO’s should embrace something like 70-20-10 method discussed above. Make sure to incorporate “lessons learned” from these experimentations in the main presentation. It will serve you and your team well.
Conclusion
If you incorporate the elements discussed here in your budget preparation, you are on your way to long-term success as CMO. Be sure to check out Alloc AI which can help in various steps above, including Attribution analytics and agentic action based on its insights.
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