5 Questions to Help Determine Your Marketing Budget

“The most common source of management mistakes is not the failure to find the right answer. It is the failure to ask the right questions.” ~Peter Drucker 

How do you decide what to spend on marketing? Ask the right questions.

An HR software company recently asked our Fisher Vista agency for a proposal to do its marketing — all of it. The company wanted to close five deals per quarter and would be relying — if we chose to respond on our proposed marketing activities to deliver the leads that would help its one sales person close these five deals. What was the budget? About $3,500 per month. How did their executives come up with this number? No idea. It was simply what they budgeted for the year. And these were really smart people — engineers.  

Determining a marketing budget is one of the most difficult tasks of management, yet it is my experience that many marketing budgets are more or less arbitrarily set and are therefore flawed. One common method of setting a marketing budget is percentage of revenues. Here are some averages, by industry, that I found from various sources:  

Another source suggested that a proper marketing budget was between 2% and 10% of sales, but noted that for B2C, retail and pharmaceuticals this percentage can exceed 20% during peak brand-building years.

Percent of revenue is an interesting benchmark for comparison reasons AFTER you have set your budget but not what I advise as the starting point to set the budget. A better approach for setting a marketing budget, especially for mid-size HR B2B companies, is to work backward and ask five critical questions:    

  1. What is our revenue goal for the year?
  2. How many new deals per month do we need to reach this goal? 
  3. What is the number of sales leads we need to close one deal?
  4. How many leads do we need per month to reach our revenue goal?*
  5. What marketing activities are most likely to give us this amount of leads?
(* The answer to question 4 is the result of multiplying the answer to question 2 by the answer to question 3.)
I know that I am oversimplifying and that other variables like sales cycles, competitive behavior, market maturity, product life cycles, strength of brand, buyer demographics, quality of leads, etc. come into play, but the point is to have a logical approach to setting a realistic marketing budget. And these five questions get you thinking the right way so that the approach is not arbitrary. 

Let's take a closer look at questions three and five. These are the tough ones. 

In order to answer the question “what is the number of sales leads we need to close one deal,” you need to study your average closing ratio, which is typically defined as the number of deals you close compared to the baseline you use, the most common being the number of leads, calls or presentations. This can be tricky because the ratio will vary considerably depending on whether you use leads, calls or presentations.

Lets assume you use demos (presentations). If the average sales rep gives 10 demos per week and closes two deals, then their close ratio is 2/10, or 20 percent. But this does not factor in the amount of marketing necessary to create those demo opportunities. After all, a salesperson is only as good as his/her leads — right :-) So let’s focus on leads. Quality of leads is never a constant, but if your marketing is targeting the right audience (we'll get to that in a moment) then you can come up with some decent estimates. For example, one might determine that for every 20 sales leads your marketing is currently delivering, 10 are worthy of your time, 5 will talk with you, 3 will want more information and 1 is likely to buy (5% leads to close ratio). So if you want to close 10 deals per quarter, you need to generate 200 qualified leads.

Now for the question of what marketing activities are most likely to give us these 200 qualified leads per quarter. Let’s not forget that you can have the right budget but spend it on the wrong things. This is the most challenging question of the five because there are so many available tactics. Popular tactics for many HR B2B companies include:

To learn more about the role of various marketing tactics in the buying process please see our e-book, the B2B Marketing Allocation Guide.
As you can see there are many tactics to choose from and each tactic serves a different purpose. Some tactics, like direct email marketing, are all about immediate lead generation, while others, like social media, function more like advertising (brand building). So if you spend your entire marketing budget on social, you run the risk of not getting your 200 leads. But spending nothing on social may also prevent you from reaching your goals. Remember those little things like strength of brand and the interrelationships between branding and lead generation...? Hey, nobody said this was easy.

According to MarketingSherpa, 61% of B2B marketers send all leads directly to sales, yet only 27% of those leads will be qualified. So a critical first step toward improving closing ratios (and determining a realistic marketing budget) is to target marketing efforts to bring in better-qualified leads. And the best way to do this is to nurture all your qualified leads. Consider these facts:

After asking the five questions listed above and giving considerable thought to the types and amountsof marketing tactics necessary to reach your sales goals most companies will, or at least should, conclude that:

(1) they need to invest in a variety of marketing and PR tactics to meet their goals 

(2) they need some sort of lead nurturing program in place to warm up their leads before handing them over to sales and 

(3) a steady amount of fresh, engaging "content" (blog posts, articles, white papers, etc.) will be required to support the marketing activities and lead nurturing.

Doing this well is not inexpensive but is more likely to deliver long-term, sustainable results. Doing it poorly is potentially a recipe for blowing your entire marketing budget. Your choice. 

Learn more about using content and lead nurturing to boost your marketing and sales by reading our latest article (no registration required), “Content Marketing — The Best Way to Reach and Influence HR.” 

Post written by Mark Willaman, the founder and CEO of  HRmarketer.com, SocialEars HR and Fisher Vista Marketing. Connect with Mark on LinkedIn

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