When it comes to the marketing budget, there’s only so much funding to go around. Everyone on the team wants a big piece of the pie, but there’s not enough pie to please them all.
Ecommerce VPs often tell us their budget planning often turns into a power struggle. When all’s said and done, a few people are happy, but others are in despair, thinking “How can we get the work done without the money to afford it?”
Morale can bottom out, and optimism can turn into focusing on the impossible.
Marketing leaders need insight into how to manage their marketing budget most effectively, and that’s exactly what we’re covering here.
Here’s what to come:
- How to create a marketing budget
- Allocating your ecommerce marketing budget
- Best practices for marketing budget allocation (with examples)
We’re going to present a rational, numbers-based, and fair approach to budgeting that can cut down on the headaches and end up boosting team spirit around marketing efforts instead of throwing water on the fire.
This post will highlight our recommended approach to allocating your marketing budget for maximum value and ROI.
How to Create a Marketing Budget
To create an effective ecommerce marketing budget, you need to first align departmental goals with business goals. Often, these are not going in the same direction.
Think about it this way, if you’re a skincare brand your goals might be something like:
- Sales team: reach a revenue goal for facial cleansers
- Business development team: build partnerships with national online retailers to distribute lotions
- Marketing team: increase website traffic with a promotion on under-eye cream
Even if at the end of the quarter if each team meets their silo-ed goals, revenue won’t be nearly what it could have been if all three teams had aligned around the one common business goal.
This won’t be easy, but it’s worth having a hard conversation before setting your marketing budget.
Once business and marketing goals have been established, follow the below steps to craft a marketing budget that is sure to drive results.
- Outline your sales funnel
- Conduct a marketing audit
- Set your marketing budget
Let’s start with outlining your sales funnel.
Outline Your Sales Funnel
What is the path customers are taking before arriving to purchase and how can your marketing budget address any gaps or sticking points?
A tactical and data-backed way to analyze your sales funnel is using your ecommerce website’s Google Analytics Goal Flow report as a supplement to any qualitative outline you build.
This report shares insight on how visitors to your ecommerce website are navigating the journey from awareness, to interest, to desire, and to sales. Use the report to establish a typical funnel towards conversions, and point out the stuck points in the customer journey.
Since we’re talking about a marketing budget, I’m also going to emphasize the need to understand how customers become aware of your store or your product. Consider elements like social media, email marketing, word of mouth, and Google. One of the best ways to contextualize the data you gather from Google Analytics is with customer research.
Another helpful exercise is a more specific sales funnel analysis for ecommerce brands: conversion funnel analysis. This identifies the weak points in the customer journey specifically related to your online presence.
Your website is likely the most important part of your brand and sales journey for customers, so it’s best to have an understanding of what is working and what isn’t.
Conduct a marketing audit
Now that you have an understanding of your sales and conversion funnel, it’s time to take a look at the marketing strategies you already have in place and how they can be improved.
Use a critical eye to determine, are your current marketing tactics helping you to reach your previously established business goals?
- Google Analytics: There is an overwhelming amount of helpful data in Google Analytics to consider as you build a marketing strategy, so we put together the 5 reports essential to any ecommerce business. Set these up if you haven’t already, and run through the data and metrics to find areas that your marketing (and other arms of the business) can be improved.
- Competitive analysis and website benchmarking: Conduct competitive research on your industry. But while you do this, remember, you do not know if their strategies are working or not. This is simply a good way to get a feel for your category landscape. Once you have some qualitative ideas, check out our guide on website benchmarking for quantitative competitive analysis.
This marketing audit will help you establish two key steps in building your budget: identifying what strategies are getting the best results, and what strategies you are missing. Tailor your marketing plan accordingly.
Set Your Marketing Budget
Now let’s establish some guidelines as you set a portion of your overall budget towards marketing.
In an annual survey of Chief Marketing Officers across industries, the percentage of budget allocated towards marketing has held consistent between 10% and 13% for the past eight years. This same statistic as a percent of total revenue ends up anywhere from 5% to 12%.
These statistics hold true when compared with another source. The U.S. Small Business Administration suggests companies allocate 7-8% of their gross revenue towards marketing and advertising. This would be 10-12% of net revenue.
It is also interesting to note that generally, smaller businesses allocate a larger percentage of their budget towards marketing (we’ll dive into some specifics on that below).
Based on these guidelines, consider your total organizational budget (or revenue from the past year) and set your budget accordingly. The research and analysis you did in steps one and two should help you convince leadership why you need budget for your efforts and how you’ll be adjusting allocation based on your findings.
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How to Allocate Your Marketing Budget
When we look at the proposed marketing budget breakdown with our clients, one thing is almost always apparent: imbalance.
Whether because one manager carries more influence than another, past experience pushes more of the chips in a certain direction, or some other reason – marketing budgets and marketing activities tend to go heavy in one area and light in another (like a guerrilla marketing campaign).
To counteract that tendency, we urge management to create three primary budget columns: Branding, Traffic, and Conversion Rate Optimization.
Branding seeks to position your company as the leader in your niche. When someone brings up the products or services you supply, branding helps make sure you’re the first name mentioned.
This column will likely be the hardest to track a return on investment, but no matter how well you do at traffic and CRO, if people don’t know, like, and trust your company, sales are going to be tough to get.
We place paid and organic traffic in the same budgeting group. Both are concerned with generating traffic, and both require funding.
This bucket is key to driving consumers to your website. According to a study, search traffic generated 65% of total ecommerce sessions, with 33% generated through organic search and 32% was generated through paid search.
It’s a mistake to think of organic traffic as “free.” It is not. Whether you pay (in-house or a marketing agency) for search engine optimization (SEO) work or (more sustainably) prepare content for your website to draw visitors in, organic traffic requires funding.
Most companies should look first to their organic (owned) traffic for a steady, ample flow of visitors – then use paid traffic as a way to augment and shore up the numbers. Beware of underfunding the organic effort, then ending up having to overspend on advertising and pay-per-click campaigns.
You can do an excellent job of branding, but if you don’t have traffic lanes set up to get your offers in front of your prospects, how will you make sales? Branding is critical to marketing, but so is traffic.
Conversion Rate Optimization (CRO)
Your audience knows who you are and believes you can solve one or more of their problems better than anyone else.
You have traffic systems in place to direct those who need the solutions you offer to your website and landing pages.
Sounds like the perfect set-up, but one huge factor is still missing: conversion rate optimization (CRO). If you struggle to turn visitors into buyers, you’ve spent your branding and traffic budget unwisely.
You’re not in business to pay for getting people to your site, you’re in business to help them through the process of buying from you. And THAT is the job of conversion rate optimization.
The interesting thing is that CRO is one of the main areas ecommerce brands miss when allocating their time and resources (like their marketing budget).
It really pains us to see this happen because the truth is, CRO can have the greatest ROI compared to many other marketing strategies you may utilize (SEO, traffic generation, social media, etc).
You should try out our in-depth ROI of Conversion Rate Optimization Calculator to help estimate the potential ROI you could be receiving from conversion optimization.
Sample Marketing Budget Breakdown
Remember how we said most marketing budget plans are out of balance? Typically, that means either branding or traffic activities are overshadowing the others. CRO activities are often seen as a one-shot process, resulting in a ‘set it and forget it’ attitude.
That’s a huge mistake.
Let’s look at how the numbers can work for you or against you.
In the example above, the budget split gave branding and traffic an equal stake in the campaign. CRO got the remainder.
The company invested $50K and created $200K in sales. That’s a healthy return, and they’re happy with the results.
What if the ecommerce VP decided to try boosting results for the next campaign by budgeting for a much-needed conversion rate optimization tune-up?
Let’s look at how that scenario could quite easily play out…
These numbers are typical of the results we see at The Good all the time. If anything, they are downplayed. Ecommerce managers are often mystified when they take a look at calculations on the potential returns from conversion rate optimization activities.
There is magic in the math. CRO can do more than double ROI – we often see companies double or triple (or more) what was already a pretty good return.
In the example above, the total budget for the campaign didn’t change. The allocation was adjusted, moving a portion from branding and traffic to the CRO column.
Because conversion rate optimization tactics serve to both increase the conversion rate AND the average order value, total sales and ROI more than doubled – even with HALF the traffic!
Marketing Budget Allocation Best Practices (With Examples)
Let’s check out some marketing budget allocation best practices and results from real-life ecommerce brands.
Test, optimize, and be flexible with your marketing budget
As with most business best practices, it’s important to stay flexible so you are always able to adapt to unforeseen circumstances. Form Nutrition CEO, Damian Soong, cites specific examples in the COVID-19 pandemic and iOS14 updates.
“I think if COVID, and the iOS14 updates, have taught us anything it’s that we need to be flexible. To maintain this within a budgetary approach we tend to think of high-level strategic goals we must hit – eg total marketing spend of 20% revenue for example, but leave things quite fluid channel-wise within that.”
The team at Form Nutrition, which offers quality vegan protein powder to consumers, uses a test and learn approach to their marketing budget to hit overall profitability goals but shift budgets based on what’s working or not. “For instance, if we see CPMs falling we can shift budget in that direction. Conversely, if a live event comes up we can pull budget from digital marketing and move it toward live.”
The team at Origin Meals has a similarly experimental mindset when it comes to their marketing budget allocation.
Alan Harris, Vice President of Growth at the company that delivers locally-sourced sustainable meals, told us “Typically we are spending ~80% of our monthly budget on well-understood and measured marketing channels (currently PPC, organic social, email and content marketing) and giving 20% or more to experimental or seasonal opportunities.”
This strategy has fared well for the team in the past, and continues to offer a growth opportunity without sacrificing what they know works.
Alan added “The core 80% we allocate should be sufficient to keep pace with natural customer churn, while the remainder is how we test into new growth channels. That said, we are always opportunistic and aren’t afraid to expand our testing efforts if we think there is a reasonable chance of a strong ROI.”
This is a smart way to approach your marketing budget allocation. Go in with tried and true methods, but leave room to flex your budget depending on where you see ROI – or opportunity for ROI.
With a smart marketing budget, Snow Peak grew online revenue by 149%
Snow Peak sells premium quality outdoor lifestyle products. Like many ecommerce businesses, when we encountered the brand, they were spending a big chunk of their marketing budget on traffic acquisition, but they weren’t realizing a sufficient ROI on that spend.
Snow Peak needed an online overhaul to improve their average order value and conversion rate.
A more in-depth version of the marketing audit and sales funnel analysis we suggested above, this comprehensive work by our team of strategists uncovered the blockages and friction points preventing visitors from becoming paying Snow Peak customers. Implementing the successful test results resulted in:
- The year-over-year sales revenue increased by 149 percent
- The average order value grew by 30 percent
- The visitor-to-buyer conversion rate grew by 108 percent
Snow Peak’s brand manager, Russell Borne, said “we saw a 30% increase in average order value, and that wasn’t throwing money into the black hole of digital advertising, but tweaking and honing in the site to be effective.”
You see, when you are smart about your marketing budget allocation and include CRO in the mix, you can see unbelievable results.
Diversify your marketing budget
As the paid ad landscape changes, there has never been a better time to keep your marketing efforts diversified. With a few channels included in the branding column of your marketing budget, you not only reach a more varied audience, but you avoid one channel driving all your growth.
Lillie Sun at Three Ships chimed in with thoughts on the topic. In order from highest spend to lowest, “at Three Ships, we split our marketing spend mainly between paid ads, influencer budget, PR, email/SMS, and content sourcing.”
By including a variety of channels, the team can stay flexible about where to scale to maximize return on ad spend (ROAS). “For example, we were planning on scaling digital marketing spend for paid by an additional 20% for May but because we weren’t confident in our ROAS, we ended up not scaling as much. Only once we’re confident in the way something is scaling and we believe we have the process correct, that’s when we’ll really ramp up spend in that domain.”
With that in mind, Lillie shared an important caveat: don’t have one marketing channel drive all your growth. “I’ve spoken to brands who rely 100% on paid and when they pause ads, their daily sales will go from 10k a day to $300 a day.” Given the current landscape for paid advertising, this strategy is big miss. “It’s extremely important to diversify your marketing spend and have multiple channels going at once”
Tailor your marketing budget to your growth stage
Now, there is no secret that having more money has its advantages. But that doesn’t mean a small business or new brand can’t compete with larger brands.
We checked in with Connor Gross of Respoke Collection, creator of custom car portraits and a newer brand in the ecommerce space, for insight on how their team approaches marketing budget allocation.
“One thing we have to focus on as a new brand is immediate ROI. Unlike brands who have raised money, we are focused on becoming profitable from day 1.” Here you can see the importance of goal alignment in your marketing budget allocation process (which we covered at the very beginning of this article). Connor and his team know that their goal is to be profitable, early. “Which means we spend a lot of our budget on channels that deliver immediate ROI. The main one being Facebook advertising.”
It won’t necessarily always be that way, “As we grow and are able to have excess cash, we will focus more on long-term ROI channels such as organic search and eventually brand plays in the automotive market in the future.”
Regarding small business marketing budget allocation, Jon MacDonald, founder of The Good, discussed this at length with Ryan Garrow of Logical Position, on their podcast Drive & Convert. You can listen to the whole episode below, but I’ll also pull some highlights for you.
- Leverage your flexibility: As a small business, there is less red tape to get things approved, and you can move more quickly into new markets than bigger brands can. Use this flexibility to your advantage in all aspects of your business, including marketing.
- Focus on the details: You have the chance to pay attention to every detail, while larger brands have to focus on the macro numbers. You have less data to sift through, so you can catch areas for growth faster. Be aggressive when you see an opportunity.
- Consider hiring expert marketing services: Quality help can go a long way. It is worth interviewing agencies or freelancers to manage a spend of as little as $1,000. You’ll pay for their expertise, but your dollar will go much further and can help you hit the target more quickly.
- Be hyper-focused: As a general rule, anything less than $1,000 for marketing could likely be better spent elsewhere. But, if you have your heart set on paid advertising online or CRO, then make sure you find pockets where you can dominate or win.
The most important thing to ask yourself as a small or new business is how can you achieve your goals and how can you find the time and the money to really make it work?
Don’t Wait to Add CRO to Your Marketing Budget
As you can see, creating and implementing a marketing budget that drives results is not set it and forget it. You should be constantly analyzing and improving your budget allocation based on what strategies are exceeding your goals.
This is similar to the marketing budget column we mentioned, Conversion Rate Optimization. And that’s what we can help you with. Our team of strategists does in-depth qualitative and quantitative research on your site and makes recommendations for improvement. We then test those recommendations before handing them off to you to implement. We generally see 9:1 return on investment for our services.
Interested? Submit your website for a free landing page assessment and we’ll point out some of the areas you can improve to drive conversions today.
About the Author
Jon MacDonald is founder and President of The Good, a conversion rate optimization firm that has achieved results for some of the largest online brands including Adobe, Nike, Xerox, Verizon, Intel and more. Jon regularly contributes content on conversion optimization to publications like Entrepreneur and Inc. He knows how to get visitors to take action.