How to allocate your digital budget?

Posted on Monday, 11. November 2019 in category Digital marketing. 7 min read • Written by

Črt Podlogar

“What is the budget you have available?” is probably the most hated question an agency can ask a client – especially when discussing strategy and partnership with a client for the first time. “Why don’t you suggest what we should invest?” is probably the most hated reply of a client to that question.

Not because marketing budgets are impossible to calculate, but because it’s impossible to even estimate a budget without having information about the client’s company that is typically privileged information only divulged after a contract and an NDA is signed.

I know it sounds like we’re fishing for the highest possible number the client is willing to work for when asking for available budgets but knowing almost nothing about their business, historic performance, current and past investments and goals it is not only impossible, rather, it would be irresponsible to suggest budgets or project possible results.

We try to use a discovery process with potential new clients these days to make sure we’re making sensible first steps with the client. You can use those exact same questions to estimate your budget and plan where it should be invested depending on some factors.

1. What is your gross revenue and what share of it will be your marketing budget?

There are a lot of different rules of thumb for defining marketing budgets. The most typical setup for new companies is to spend between 12% and 20% of total gross revenue on marketing. I know the range is quite high but so are the margins and prices of companies depending on whether they provide services, B2C or B2B products and so on.

Established companies typically can and should spend a smaller share of their total gross revenue on marketing – typically somewhere between 6% and 12% of it. Mainly because they already have some brand recognition and existing customers that will drive a certain amount of sales without too much marketing effort.

2. You need to decide which of the three categories you belong in: Digital only / Digital first / Multichannel

On average a company will invest between 30%– 40% of their marketing budget online, the rest will be invested into OOH (out of home) and offline advertising. This is especially true of multi-channel companies that exist outside of digital and have a broad demographic structure of their customer base.

Digital-only companies or digital-first companies will have bigger digital budgets, which typically means more channels and more middle-of-the-funnel (MOFU) and top-of-the-funnel (TOFU) activities – this again defines your budget allocation.

3. Are you a sales-driven or a marketing-driven company?

This question will greatly impact your budget allocation across the funnel. Sales-driven companies and management typically hate to invest in top of the funnel – brand awareness, reach and ad impressions are fluffy concepts they don’t care about. It’s all about the cold hard cash.

If you’re a sales-driven company your budget will reside mostly at the bottom of the funnel (70%–80 % in my experience) and will occasionally take a trip up towards the middle of the funnel for some special campaigns.

Performance channels that have a proven ROI will be the ones you will focus on the most.

4. What are your goals for the next two years?

Many of my clients made the mistake of defining marketing budgets first and only after that defining their business goals. The reality and needs of your business should always define and drive your marketing and sales. It makes absolutely no sense to plan marketing before you have planned the end result you need.

Be specific with your goals – companies love to operate with goals such as 20% YoY increase. That’s great, but that’s the end result – what you need to define is specific goals that will help you define which digital marketing channels should be utilized and to what extent.

A 20% YoY increase of revenue gives you very little insight. 5,000 new e-mail contacts, a cost-per-acquisition of €20 or less and an average conversion rate of 1.7% and an increase of at least €250.000 in online revenue are the types of specific goals that will help you plan your budget.

5. How is your cash flow?

If you have good cash flow and money in the bank, you will be able to focus more on TOFU and MOFU (still remember what these are?); if you’re re-investing revenue you make back into marketing, you will probably be more generous with marketing budget in the bottom of the funnel.

Companies that re-invest their earning instead of burning money already in the bank typically focus more of their budget on Google Search and sales-focused features on Facebook and Google Display Network such as dynamic remarketing as they have more immediate results. Surplus money that is generated at the bottom of the funnel is then re-invested into more “unicorn” style activities that nobody can really tie back to sales but we all know they generate it.

6. Does your digital marketing budget also cover your digital R&D and infrastructure?

Don’t plan to invest your entire digital marketing budget into marketing. A typical problem with most companies is that “digital” doesn’t have its own R&D and infrastructure budget, instead everything even remotely related to a computer falls under the “digital marketing” budget – employees, tools, services, agency fees, website maintenance, design overhauls, website development, hosting, buying stock images and the list goes on.

I don’t want to rant too much, but typically a physical store renovation and cost of the construction company doesn’t come out of your offline marketing budget, does it? When planning your digital marketing budget make sure you’re actually operating with your MARKETING budget, not “digital” budget.

7. How important are different parts of the funnel for you?

Before you can allocate your budget you need to understand the dynamic of your customers and your brand. If you have a lot of competitors or if you’re relatively new to the market, you need to be at the top of the funnel making sure people are aware of your brand and know what you’re selling.

If you have competitors who invest heavily into Google search and have high impression shares on key top performing keywords, you need to be there fighting the good fight – and that can sometimes cost a lot of money and even consume entire digital budgets if they’re not big enough.

Where you want to focus as a company in the funnel and where your competitors are making the biggest effort will always define your strategy in a big way.

8. Who are your key competitors and how do you compare?

Performance marketers hate to talk about top of mind, because they find it a fluffy metric that tells you nothing. I beg to differ. Understanding the market and your position in it is crucial if you want to make a smart marketing investment.

If you are number 55 when users are asked who comes to mind when buying product X, you can have the most pimped out Google search marketing strategy and it will do very little for you – you need to build trust, brand recognition and let people know you sell product X before you can start counting money.

Weak market position and small market shares typically require bigger spending at the top of the funnel or at least middle of the funnel – this means you will probably have bigger budgets on Facebook, Google Display Network and YouTube, compared to Google Search and remarketing.

9. Where do your customers spend their time?

It’s important to understand who your ideal customers are and what they do with their time. If you’re in a hardcore B2B business selling industrial machines worth hundreds of thousands of euros, Facebook or Snapchat is probably not the best place to invest your money.

B2B companies and services catering to people with a specific vocation will fare best on Google Search and networks such as LinkedIn. If you’re selling fashion accessories, Facebook and Instagram will be the best investment you will ever make.

Google Search is a fairly safe bet in every case – if people are searching for products you sell, it is generally a good idea to be there. And I’m still waiting to find an exception to that rule.

10. Where can you target your customers best

If you want to target project managers, then it’s LinkedIn. If you want to target young parents who like Yoga and Beyonce, then it’s Facebook. If you want to target specific queries, it’s Bing or Google Search. If you want to target kids, it’s Snapchat. If you want to target fashionistas, it’s Instagram.

Think about what characteristics define your ideal customer and where you can target people based on those characteristics.

Look Črt, we demand answers, not questions…

If you demand answers, I will give you one – if you choose to ignore the questions above and want to rush to the end of the movie, do so at your own peril.

If I were running your company, whatever it might be, I would allocate my budget as follows:

  1. I would use the 60/40 rule for the split between performance (BOFU) and awareness (TOFU + MOFU) for a mature company and a 40/60 split for a new player on the market
  2. I would invest 60% of my performance budget into Google Search, the rest would go into Facebook newsfeed and carousel ads with specific targeting attached to them and remarketing campaigns – dynamic remarketing is a MUST if you have a lot of products
  3. If you operate in a market where Bing is a thing – split the search budget 70/30 in favor of Google and check the results after 14 days
  4. Awareness budget is split equally between Facebook and Google Display Network – the first one will give you more relevant traffic and targeting, the latter will give you more reach and ad impressions – after 1 month pause one of them for 14 days and give all the budget to the other – repeat the process in reverse after 14 days and then decide what impact each channel has
  5. I would split my budget and plan so it reflects seasonality of the business.
  6. I would keep 10% of the budget on hand for experimentation or emergency. If after 2 quarters I was fairly on plan, I would experiment with new channels such as Quora, Reddit, Zemanta, AdRoll, DoubleClick or other platforms. If I’m f**ked and way behind, I’m spending my 10% savings to try to get back on track in Q3 and Q4.

Disclaimer: the budget split above does not account for B2B-heavy companies or some bizarre random high-tech/ICO-like/super-geeky thing. Any of those require a tailor-made approach to channel selection and budget split is part of a carefully crafted strategy.

The last tip: a budget is a living thing. The worst mistake a marketer can make is to split the budget in November for next year and then revisit the budget split when the year is over. You will often make mistakes in planning or new opportunities will present themselves as the year unfolds. Do not miss out on them just because you made an Excel file a few months ago.

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