Developing a strong marketing budget that is aligned to your business goals is one of the most critical initiatives for any marketer. You need to approach your marketing budget like an investor. Your role is to allocate your capital (mostly program budget and people resources) in an efficient manner that helps you achieve your business objectives.

Over the last 30 years, I’ve had the opportunity to review well over 1,000 marketing budgets, starting with the budgets I built and managed directly, and through the complex set of budgets I reviewed as the CMO of a $2B software company, including those of the 100 M&A transactions in which I have been involved.

Through lots of trial and error, and input from some of the best marketers I know, I developed the following cookbook for developing marketing budgets.

Start with your marketing goals.

The first step in any marketing budget is the establishment of marketing goals for your planning period. Your goals should be directly related to the overall business goals for your company or business unit.

Your goals should also follow the SMART format (specific, measurable, achievable, relevant, and time-bound). For example, if you are the marketing manager for the ABC product line, instead of creating a goal that says “increase website traffic”, you might write a goal that says “increase qualified website traffic for the ABC product line from 5,000 monthly users to the ABC product landing page to 7,500 monthly users for the last month of the fiscal year.”

You should have anywhere from 3 to 6 goals ideally. Less than 3 and it’s likely that you are not being specific enough; more than 6 and it becomes difficult to focus. The best way to think about these goals is the following: if I exceed my targets for the metrics in all of my goals and nothing else, can I definitively prove that I have fully achieved the objectives for my job?

Review what worked and didn’t work from last year.

Within the context of your goals, review the performance of key programs and campaigns from the last year. You can start by sorting them in 2 piles based on whether you would do the program again or not – simple “in” or “out” buckets. Then you should write down the key overall insights from last year. This doesn’t require fancy analysis, just a few comments like: “less physical events this coming year”; “the account based marketing program was really starting to work”; and “less tactics and more broad campaigns.”

Put your two lists aside (we will come back to them in the end) and move on to the upcoming year.

Now throw away last year’s budget.

OK, maybe not literally throw it away, but the worst thing you can do is copy the budget from last year and use it as a template. That kind of incrementalism is what has stifled creativity and slowed the shift to new marketing approaches.

For example, I worked with one product group that consistently spent about two-thirds of their budget on physical events. Every year we would have the same argument: I would recommend that they shift more of their physical event spending to digital channels and they would say, “but we already committed to the event last year” or “the sales team really wants to attend that show.” Unless you force yourself to break the mold, you are doomed to live within its confines.

Figure out how much you should spend.

Now that you have the context in which to frame your plan, it’s time to talk about how much budget you have to allocate toward execution. In many cases, the budget will be delivered to you from management as part of the planning process. But even if you aren’t in charge of determining the budget, you should still have a clear idea about how much you should spend to achieve your objectives.

I encourage people to think like CEOs. When you ask a CEO how much they think they should spend on marketing, they often say, “as little as possible and as much as possible.” In other words, you want to spend efficiently to maximize your return, but you also want to make sure that you are investing as much as practical to drive growth.

You can look at industry benchmarks as a data point, but that should not be the sole source to decide how much you should spend. There is an excellent research study called The CMO Survey that provides useful benchmarks for marketing spend by industry.

You should also have an understanding of the unique financial characteristics of your business. For example, what is the gross margin for your business? If you sell physical goods or services, there is a significant amount of your revenue that has to pay for the cost of the product or service that you provide to your customer – but if you are a software company, your cost for providing the service might be small compared to what you receive in revenue. As a result, you have a smaller percentage of revenue to work with if you have low gross margin businesses. You also need to understand the other elements of the P&L, along with your profitability goals. If you are a new company that is just starting out, you might spend more on marketing as a percentage of your revenue until you reach a larger revenue size.

For illustration purposes, I am going to assume that we are managing the budget for a software company with $20M in annual revenue with modest growth – and we have a budget of $1M for marketing programs – 5% of the projected company revenue.

Plug in the non-negotiables and unforeseen items.

Now that we have a target budget, let’s determine how much of that budget is available to allocate. I like to start with the “non-negotiables.” These could include:

Existing, contracted program commitments, like trade show space you reserved, prepaid items from a previous period, etc.
Committed retainers for key agencies including PR firms, advertising agencies, etc.
Ongoing expense items including web hosting, software licensing, etc.
People-related expenses, if you are accounting for staffing in your budget.
Infrastructure-related expense, if you are accounting for those items in your budget.

Once you have written these items down, you should really challenge your assumptions to make sure they are all truly necessary. You should also consider what percentage of your budget has already been determined before you started. In most situations, the committed programs should be no more than about 20% of your program budget. If it is more than 50% of your budget, you might have a bigger problem.

For our example, we will say that $100,000 is non-negotiable, leaving $900,000 for us to allocate to other programs.

Next, hold some of your budget to the side for unforeseen items. This can include unexpected expenses and budget cuts, but it can also help when you want to try a new concept or if you have a program that is working well and you want to add more budget to that program without having to cut something else.

Our example now looks like the table below:

Create broad campaigns or themes.

Now comes the fun part. At this stage, many people are tempted to dive into very detailed items, like their monthly Facebook advertising budget, but you should resist that temptation and instead sketch out the broader, longer-term campaigns that will help you achieve your goals. I like to use the following process:

Starting with my goals, develop a list of corresponding generic campaigns that will help me achieve the goals. For example, if you have a goal to increase your revenue from your customer base, you might have two corresponding campaigns: “account-based marketing campaign” and “customer advocate marketing”.
Identify any key initiatives that didn’t make it into your top goals, like a major product release or other company initiative.
Now take the list of campaigns and assign a rough percentage of your available budget by quarter. If you have 5 campaigns, you might treat them equally and give them each 20% of your budget, or some campaigns might be weighted to certain quarters. These rough guidelines will help you make sure you are focusing your budget on the themes that are driving your business objectives.

Our example might look like this:

Validate and balance.

At this stage, we have a solid framework for a budget with campaigns that are designed to deliver on the goals you set up at the beginning of the process.

Now that you have done a rough allocation, it is time to make sure that the KPI targets are in fact achievable. In my example above, I have allocated 25% of my available program budget to new customer acquisition for the first half and 20% for the second half. That translates to $50,000 per quarter in the first half and $40,000 in the second half. If my target is 100 qualified opportunities delivered to sales per quarter, that means that I expect to pay $500 per qualified opportunity in the first half and $400 in the second half. Look at your historical data and make sure those assumptions are not out of line with your past experience.

Before the ink is dry on your budget, go back to your two lists from last year and make sure you have implemented your recommendations.

As you go through this process, you might change the campaign allocation – or you might want to go back and re-assess the KPI targets you chose for your goals.

You can also go back to the non-negotiable items and see if they can be assigned to your overall campaigns. If you already made a commitment for a customer advocate marketing platform, for example, that should be moved from the “non-negotiable” bucket to the customer advocate marketing campaign.

Presenting the final budget for approval.

With this level of detail in hand, you will be well-equipped to present the final budget for alignment and approval. You should make sure you are aligned with other functions to make sure that you have agreement on any dependencies you need and the delivery commitments you are making to the sales team.

When you present a budget that is grounded in business goals tied to KPIs, communicated in broad campaign themes that are designed to achieve those goals, and validated with historical performance or external benchmarks, you will greatly improve your likelihood of budget approval. And the real value with this approach is that you are much more likely to actually achieve your objectives.