When developing a B2B marketing budget, the smart money is on revenue goals and related lead generation rather than past budgets or competitors.
One of the most emotional topics in the world of B2B marketing is budgets. How much to spend, how to allocate the budget line items.
And the topic is growing more heated as the new marketing options arise and continue to evolve. It can be overwhelming and is never resolved to everyone’s satisfaction.
In fact, in a B2B marketing study, MarketingSherpa confirmed that the greatest barrier to marketing success is “lack of resources in staffing, budgeting or time.”
There are a number of approaches that have been used over the years to help marketers and management determine how much to allocate:
Percentage of Sales Method
This is probably the most popular approach due to its simplicity. Using this method, marketers allocate a percentage of their sales (not their profits) to their marketing budget. Percentages are fairly consistent within different categories, but this tends to work better in more stable categories.
Unit of Sales
Based on a company’s experience with their own sales and how much marketing it takes to sell each unit, some companies assign a fixed amount for each unit to be sold. For instance if past experience indicates that it takes $10 of marketing costs to sell one widget, and a widget manufacturer needs to move 10,000 units, $100,000 will be budgeted.
Objective and Task Method
This is probably the most effective but least used method because it ties the marketing directly to the achievement of specific business goals. Once concrete business objectives are determined (e.g. “expansion of area market share by 10 percent within a year”), the marketing is then estimated to determine the cost. Of course, financial reality still has to play a part if the business objectives are not realistic.
This approach is based on expected income from a new customer and the cost to obtain that customer. Software as a service companies use this approach. For instance, when they estimate that a potential new customer will spend $300/month on an average contract lifetime of say, five years, they know that that customer will generate $18,000 for the life of the contract. From that $18,000 they estimate the gross profit, what they’re willing to spend to get the customer and how many customers they want to attract.
Competitive Parity Method
The idea here is that if a business is aware of how much its competitors are spending on marketing, it can use that as a benchmark from which to stay competitive, spend more or less. The problem with this approach is that competitors often have different marketing objectives and tactics, and examining only the amount spent on marketing can be delusory.
Market Share Method
This is similar to the competitive parity method above, but it is based on external market trends and also requires a method of measuring your market share, which not all marketers can easily do. Another drawback is that this does not incorporate market share growth goals.
Affordable Funds Method
Here companies base their budgets on what they can afford. This approach is simple and dangerous because some firms can afford more marketing budget than they really need, while others with limited funds should invest more to build their business.
Focus on Lead Generation Goals
What is most important to remember when budgeting for B2B marketing however, is what the marketing needs to accomplish more than anything else: lead generation.
In the same marketing benchmark study, MarketingSherpa confirmed that five of the top six B2B marketing priorities for companies are related to leads:
- Lead generation
- Converting leads into paying customers
- Lead nurturing
- Lead qualification and scoring
- Lead hand-off and management
The fastest way to develop a meaningful marketing budget is to tie marketing’s lead generation activities directly to revenue goals.
To start the process, marketing should do some math and work backward from sales:
1. What is your company or division's revenue goal?
2. What is your average deal size (current revenue/current customers)?
3. How many customers do you need? (revenue goal/average deal size)?
4. What is your lead to conversion rate (current customers/current leads)?
5. Calculate the number of leads needed (customers needed/average lead to customer)
With these calculations in hand, not only can you start to dial up or down your marketing budget, but marketing and sales can also be better aligned.
Your turn: how do you budget for B2B marketing?
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