“What should our budget be?” I get this question often. I used to think “as much as you can afford.” That’s not quite right. Here are methodologies and a worksheet to help you set an appropriate budget for your business’s size, goals and margins.
How much is too much?
It’s personally disappointing to me when I see store owners overspending on ads. All the time and effort spent creating products, ultimately wasted on ads that cost more than they netted for the company. Of course, there are reasons to overspend at times to acquire the customer.
Let’s say your average customer gives is worth $1,000 in lifetime value (LTV). Assume $500 of that $1,000 goes to cost of goods sold (COGS), 25% to fulfillment, and $150 is reserved for profit. That’s $150 left for acquiring a new $1,000 LTV customer. Our cost to acquire customers (CAC) should be $150 or less.
$1,000 lifetime customer value (LTV) - $500 cost of goods sold (COGS) - $250 miscellaneous costs - $150 profit taken = $150 remains to budget for your cost to acquire a customer (CAC)
With that, we know that we can spend up to $150 to acquire a new customer while paying bills and taking profit.
Let’s assume that although the LTV is $1,000, the average order value (AoV) is $250. Therefore a 166% return on ad spend RoAS ($250 divided by $150) is acceptable. That’s equivalent to a 60% advertising cost of sale ACoS ($150 divided by $250).
$1,000 LTV $250 AoV $150 available to acquire one new customer $250 AoV / $150 CAC = 166% return on ad spend (RoAS) or $150 CAC / $250 AoV = and 60% advertising cost of sale(ACoS)
Therefore, anything over $150 cost to acquire a customer, 166% RoAS or 60% ACoS is too high. Anything less is acceptable.
So to answer the question “what should my budget be?” I ask you: how many new customers do you need each month? If you tell me you need 1,000 new customers each month, I’ll take your $150 CAC and multiply it by your desired 1,000 new monthly customers and will set your recommended budget to $150,000 per month.
Note that one of the above numbers is imaginary: desired new monthly customers.
1,000 desired new customers × $150 CAC = $150,000 monthly ad budget
You can replace $150 CAC with your desired monthly revenue and a required RoAS target of 166%.
$250,000 desired monthly revenue ÷ 1.66 (that's 166% RoAS) = $150,602 monthly ad budget
That’s all, there’s your monthly budget. If it’s too much, lower it and then lower your sales expectations to match the lowered budget amount. The next question is then naturally, how much to budget per sales channel?
You could ask all your sales channels, paid search, influencer marketing, physical mailers, to generate a 166% RoAS and $150 CAC. But that’s unrealistic. Each sales channels affects other sales channels. If you eliminate paid search, your RoAS and CAC on influencer marketing will increase. If you eliminate influencer marketing, your RoAS and CAC on paid search will increase. This is because customers typically must see your brand multiple times in multiple places before they purchase and repurchase.
So should you go about setting not only your total budget, but your budgets per sales channel? This is a great opportunity to learn about the “marketing mix.”
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The “Marketing Mix”
The “marketing mix” is a term coined by Neil H. Borden in the 1950s. He based his concept on the work of James Culliton. Culliton surveyed consumer goods companies to understand what percentage of companies’ marketing budgets they typically invested into given functions (10% on print ads, 25% on television ads, and so on). He found no consistent pattern of investment. Each company followed vastly different investment amounts into each function.
“The marked differences in the patterns or formulae of the marketing programs not only were evident through facts disclosed in case histories, but also were reflected clearly in the figures of a cost study of food manufacturers made by the Harvard Bureau of Business Research in 1929.”– Neil H. Borden, 1952
Borden, therefore, made no recommendation on specific budget allocation percentages for different marketing functions. He instead assembled a list of “Market Forces Bearing on the Marketing Mix” and advised how a company could best react to these forces with marketing activities.
You can view Borden’s article at the bottom of this page.
There is no exact “best practice” as to what percentage of an ad budget belongs in PPC vs. SEM or influencer vs. snail mail, etc. Instead, the marketing mix concept gives us a framework with which to work out budgets ourselves. The below quote sums it up:
“When building a marketing program to fit the needs of his firm, the marketing manager has to weigh the behavioral forces and then juggle marketing elements in his mix with a keen eye on the resources with which he has to work.“– Neil H. Borden, 1952
Borden is saying, in short, that marketing managers must observe and react to “behavioral forces” and plan marketing activities in response. Here are some ways marketers responded to changing behavioral forces:
- Following the iOS 14.5 update in April 2021, marketing managers reacted by moving ad budget away from Facebook and Instagram.
- As YouTube reached 2+ million monthly active users in 2020, marketing managers reacted by paying YouTube influences more for in-video promotions.
- In response to health conscious snackers, PepsiCo altered its potato chip and soda recipes to contain less salt and sugar in 2023.
Enter your desired revenue and RoAS below.
Enter RoAS as a whole number (160% = 1.6).
Full Neil H. Borden Article
Check out the “The Concept of the Marketing Mix” article in its entirety below. This was printed in Science in Marketing, George Schwartz (Ed.), New York: John Wiley, 1964. There are a few sources hosting a copy and I’ve listed them below in case one or two disappear.