In a marketing community that I am a part of there was a lively debate on how to calculate marketing budgets. Having grappled with this myself for years, I found the following two simple approaches shared by the CMOs of two large startups very helpful.
The Percentage-Based Approach
Sirius Decisions benchmark data reported marketing budgets between 9-17% of revenue at startup ARR ranges (0-$50m ARR) and 7-12% at scale-up ($50m-$250m). Matt Sweezy from Salesforce did a good presentation on the five traits of leading organizations as well, where he identified over-investments in marketing as one of the major traits with a budget of 13-30% on (projected) gross revenue. It's important to mention that its different for every company depending on the appetite of the CEO/CFO and their understanding of marketing as a growth driver.
In my experience where you will land depends on a few factors:
- Growth objectives. Want more growth? Invest more in marketing
- Margins. Make more money? Invest more in marketing
- Tolerance for risk. Companies are all over the map here. Well-funded West coast companies in the US still often operate at a "growth at all costs" mentality and are willing to invest more in marketing. But for most of us, CFOs are providing guidance to "grow responsibly" meaning you are probably going to end up on the lower side of those ranges.
The Top-Down Approach
- Calculate the budget based on new revenue you're planning for the year.
- So let's say you want to add $10M in NEW revenue
- Divide $10M in NEW revenue by the ACV (average contract value aka what customers will pay you), that would give you the number of customers you need to acquire. Let's assume its $5,000, that would make 2000 new customers.
- Multiply 2,000 customers by your CAC (cost to acquire a customer) -- so let's say it costs $1500 to get a customer. That is $3M.
- That is the full budget for sales AND marketing. Marketing should be half of that -- 50% marketing, 50% sales. So the full marketing budget for the year would come to $1.5M.
I personally like the latter formula better, because it is thoughtful and forces the CFO to report on Cost per Lead and Customer Acquisition Cost.