Swipe Files - 📂 How to create a marketing budget

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When you're in scale-up mode and you have KPIs to hit... the pressure is on to deliver demos and signups. And it's a lot to handle: multi-channel strategy, remarketing, landing pages, email sequences, revenue ops, conversion rate optimization.

42/Agency, founded by my friend Kamil Rextin, has worked with companies like Sprout Social, Klue, Qwilr, Uptick, Onfleet, and many more to help them with all things demand generation. They're always my top agency recommendation for specializing in SaaS demand gen. Go read some spicy takes on freemium, "inbound marketing", and category creation and then schedule a free consultation.

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Which came first: the chicken or the egg?

Marketers suffer a similar dilemma.

Which came first: the goal or the budget?

The truth is that you can back into a budget from a goal or you can create a reasonable goal from a budget.

"We can create budget for anything as long as we can prove the ROI" is an excuse. It's lazy and unacceptable.

Budgeting on a project-by-project basis slows down progress, discourages experimentation and big swings, and boxes marketers into thinking small and too conservatively.

You need concrete methods to create both goals and budgets.

There are two foolproof methods for creating a marketing budget:

• 5-15% of annual revenue
• [(New ARR / (ARPC x 12)) x CAC] / annual retention rate

Method #1: 5-15% of annual revenue

With this method, you start with the budget and then end with the goal. The budget is essentially determined by how much revenue can be devoted to marketing comfortably, which then ultimately determines the goal.

Unlike other methods, the goal is the last piece of the puzzle and is largely determined for you.

If a business is already established and focused on profits, it may only want to devote 5% of revenue to marketing to preserve enough profit to distribute to shareholders.

For example, if the business is doing $1M ARR, the annual marketing budget would then be $50,000. And if the cost of acquiring a customer is $100 on average, then they can expect to acquire 500 new customers. And if the ARPC is $50, then they can expect to add $300k to ARR.

Finally, if the churn rate is 15% annually, then they can expect to add 85% of $300k, which is $255k to ARR, with an end of year goal of $1.255M ARR.

Method #2: [(New ARR / (ARPC x 12)) x CAC] / annual retention rate

With this method, you start with the goal and end with the budget.

The budget is essentially determined by reverse-engineering the relationship between the goal and the customer acquisition unit economics.

If a business is starting up or prioritizing growth, it needs to hit ambitious goals and then find the money to hit those goals, whether that's through existing cash flow or new cash injections.

For example, if a business has a goal of adding $1M ARR, you first have to calculate the first-year return on investment of acquiring each customer.

To do so, you would multiply the average revenue per customer by 12 to get the first-year revenue of each customer, and then divide it by the average cost of acquiring each customer.

Using the same numbers above, if your ARPC is $50 and CAC is $100, then the first-year return on investment of acquiring each customer is 600%, or 6 for the sake of the formula.

Dividing $1M by 6 would give you a budget of $167k, except that we still need to factor in replacing churned customers. If annual churn is 15%, then we need to divide $167k by 85%, which would get us to a final annual budget of $196k in order to hit the goal of adding $1m ARR.

I know that's a lot to digest, but it's simpler than it sounds.

I find talking it through to be helpful to understand it from first principles. But once you create a spreadsheet formula or use a tool like Summit, you're just plugging in numbers.

—Corey

p.s. did you see that I launched my new course, Marketing Like A Media Company? Would love for you to check it out →​

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