If you want your business to succeed in today’s internet-first world, you need to have a great digital marketing strategy. However, a great digital marketing strategy isn’t a simple matter of picking a budget out of a hat and building a few ads.
You need a strategy that is designed from the ground up to produce results.
Now, I could write countless blog posts about how to create a solid digital marketing strategy, but in this article, I want to focus on something a little more basic: your digital marketing budget.
You see, no matter how good your strategy is, if you don’t have the right budget, your digital marketing efforts will never produce the results you need .
Fortunately, while most business owners and even marketing VPs struggle to create an effective marketing budget, this article will walk you through a simple process for determining how much to spend and which customers to target with your online advertising.
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Step 1. Know Your Goals
You may be familiar with Lao Tzu’s proverb “A journey of a thousand miles begins with a single step.” What you may not be familiar with is how that proverb continues on to say “so you better know where the heck you are going!”
If you don’t know where you’re headed, you can walk a thousand miles in the wrong direction without realizing it.
Nowhere is this more true than in digital marketing. These days, there are so many options available to businesses that it can be easy to march confidently off in the wrong direction, only to find yourself out of budget and hundreds of miles off course.
This is why it’s important to define the core business goals of your digital marketing before you even start thinking about creating a budget.
Depending on your company and your role in it, there are a lot of different possible goals you could have. You might be focused on driving clicks, conversions, leads, sales or revenue.
But, if you ask me, the best goal for any digital marketing strategy is to produce revenue.
Think about it this way. You can have all the clicks and conversions in the world and still operate at a loss if you aren’t driving revenue.
So, before you start planning your budget, ask yourself, “How much new revenue does my digital marketing need to produce?” Once you have your answer, you can work your way backwards and figure out what your budget needs to be to achieve your revenue goal.
Step 2. Know Your Buyer Personas
Now that you know your end goal, you need to go back to the beginning and take a look at your customers. In marketing, we use something called “buyer personas” to define different types of potential customers that you want to market to.
Now, my guess is that you’re already pretty familiar with your different types of customers. Each one probably responds to different messaging, loves different things about your product or service and is worth different amounts to your business.
The question is, are you using that information to plan your marketing?
Odds are, the answer is no. Even among marketers, buyer personas are only rarely used effectively. Case in point, 72% of digital marketers know what buyer personas are, but just 30% of them actually use them in a meaningful way.
However, if you’re willing to do a bit of homework, your buyer personas can become one of your most valuable marketing assets and the key to creating a well-designed digital marketing budget.
One of the easiest places to get information for your buyer personas is from your sales team. You might know a good deal about your audience already, but remember, your sales team works with your customers on a daily basis.
Personally, I find that I tend to get more accurate and detailed insight from sales teams than I do from marketers. Try it out and see what you find out.
If you’re wondering how to get this conversation started, make sure that your sales team knows that you’re working on something that will make their lives easier. Ask them what kind of leads they like to work with the most and see how they respond.
After you’ve talked to sales and you’ve got a good idea of what your different personas are, it’s time to do some deeper research. One of the best ways to do this is to talk to some actual customers.
Give them a call and find out how they discovered your business, what got them to convert and what made them decide to become a customer. Their responses will be incredibly valuable for both marketing and sales.
Determining the Value of Your Buyer Personas
Once you know who you’re targeting, you need to know how much a new customer from a given buyer persona is worth.
To show you how to do this, let’s use this pricing structure from Salesforce as a model (note, I don’t have any financial interest in Salesforce, I only use them here as an example):
Using this model, it seems like Salesforce has 3 basic buyer personas. We’ll call them:
- Small business “Syd”
- Mid-size business “Mo”
- Enterprise business “Erin”
Each of these buyer personas has different needs and wants. Syd has a smaller, simpler business than Erin, which means Syd will probably search for different terms and messages than Erin and resonate with different ads.
On top of responding to different messaging, Syd isn’t worth as much as Erin. Syd will probably go for a cheaper edition of Salesforce than Mo or Erin and is more likely to stop using the software sooner.
Since SMB clients for SaaS companies tend to last for about 14 months, mid-market businesses last around 48 months and enterprise companies stick around for about 9 years, we can use that data to estimate the lifetime value of each of these buyer personas.
Let’s assume that Syd will buy 5 “starter” licenses, Mo will buy 20 “Professional” licenses, and Erin will buy 100 “Enterprise” licenses.
Here is what the lifetime value ( [# of licenses] x [licenses/mo] x [customer lifespan] ) for each of these buyer personas works out to:
- Syd: $1,750
- Mo: $72,000
- Erin: $1,590,000
Obviously, your lifetime values will be unique to your own buyer personas, but this example clearly shows how different buyer personas can be worth different amounts to your business.
Now, the question is, how much can Salesforce afford to pay for a new customer? Based on the lifetime value of their different buyer personas, they can clearly afford to spend a lot more on an “Erin” than they can on a “Syd” or a “Mo.”
But remember, not all of that money will come out as profit. We need to account for fulfillment cost (approximately 22% for a typical SaaS company), commission (we’ll estimate 9%) and overhead costs (around 40% for the average SaaS company).
That leaves us with 29% of lifetime value as net profit:
- Syd: $507.50
- Mo: $20,880
- Erin: $461,100
In other words, if Salesforce spend $500 to acquire Syd, they’ll end up making $7.50 total on the sale. However, if they spent that same $500 acquiring an Erin, they’d make $460,600!
Essentially, the lifetime value of your buyer personas tells you how much money you can afford to spend marketing to each of those personas.
3. Figuring Out Your Digital Marketing Budget
Once you know what your goals are, what your buyer personas are worth and what you can afford to spend to acquire a new customer from each persona, you can take that data and use it to create a truly effective digital marketing budget.
All you have to do is use what you know about your buyer personas to reverse engineer your budget.
For example, say you’re in charge of creating a marketing budget for Salesforce using the hypothetical buyer personas we discussed early. Upper management wants to make $5,000,000 in lifetime value from digital marketing this year.
The easiest way to get to that figure, of course, would be to close a few Erins. However, you can’t just focus on marketing to Erins. Erins are few and far between.
So, you decide to set the following sales goals:
- Syd: 960 sales ($1,682,000 in revenue)
- Mo: 24 sales ($1,728,000 in revenue)
- Erin: 1 sale ($1,590,000 in revenue)
That adds up to $5,000,000, so now the question is, how much should you budget for each of these personas?
There are two ways to answer this question. The first is to simply set a target acquisition cost as a percentage of lifetime value. For example, spending 18% of lifetime revenue on marketing is fairly standard for the SaaS industry, so you might set the following as target acquisition costs:
- Syd: $315 in marketing cost per sale
- Mo: $12,960 in marketing cost per sale
- Erin: $286,200 in marketing cost per sale
This works, but you may not actually be able to close Syds for $315 and it probably won’t cost you $286,200 to land an Erin (nor would you necessarily want to spend all of that money up front).
Instead, it might make more sense to take a hybrid approach to acquisition cost that looks something like this:
- Syd: $402.50 (23% of lifetime revenue)
- Mo: $14,400 (20% of lifetime revenue)
- Erin: $159,000 (10% of lifetime revenue)
With this approach, you still make a profit on every sale, but you sacrifice some profit margin on your Syd sales and make it up on Erins.
As a general rule of thumb, it’s best to shoot to spend less than $1 on marketing for every $4 of lifetime value you produce. If you spend more than 25% of your lifetime value acquiring a new customer, you’re usually headed for trouble.
But, that being said, it’s okay to float at around 25% of your lifetime value for some buyer personas and make your real profit on other personas.
The specific combination that makes sense for your business will be up to you, but once you know how much you’re willing to spend on a buyer persona and how many sales you need from that persona, you can use that information to calculate your marketing budget. In this situation, Salesforce would need to spend the following on each persona to hit their revenue goals:
- Syd: $386,400
- Mo: $311,040
- Erin: $159,000
Altogether, Salesforce should budget $856,440 to produce $5,000,000 in lifetime value. That’s $1 of marketing spend for every $5.83 of new revenue, so it fits the rule of thumb. Easy, right?
Well, if all of these calculations have left you thinking, “No, Jake, that doesn’t sound easy at all,” don’t worry, I’ve actually created a free calculator you can use to determine your digital marketing budget. Simply click here, enter your buyer persona data and play around with the numbers until you’ve got a combination that makes sense for your business!
Using Your Digital Marketing Budget
Succeeding at digital marketing isn’t just a matter of creating a few ads and throwing cash at them. If you aren’t strategic with your marketing approach, you can waste enormous amounts of money without even realizing it.
However, if you take the time to create a rational, goal-driven digital marketing budget, you’ll be able to save yourself a lot of frustration and heartache. As an added bonus, going through the process we’ve just outlined will also help you determine whether or not you should invest in a specific digital marketing channel.
For example, using our hypothetical scenario, Salesforce can’t really afford to spend $1.00 per click on AdWords if only 2% of those clicks become Syd leads and only 9% of those Syds close, making their acquisition cost $555.
On the other hand, if Salesforce found a keyword with a 2% conversion rate and a 9% close rate for their Erin customers, that would be a huge win even at a $100 cost per click (acquisition cost = $55,555).
Why? Because a $55,555 acquisition cost is a bargain for a customer who is worth $1.5 million!
So, if you want to succeed at digital marketing, the best place to start is with your budget. Once you’ve got a solid budget, you’ll be able to invest in digital marketing with confidence!