Whether you’re a bootstrapped startup or a venture-backed company, as you grow, you might be asking yourself if there are ways to minimize marketing expenses and optimize runway. One of the biggest challenges companies face is the marketing process in terms of strategy and acquistion of new customers. After all, the official cause of death of many startups is insufficient funds: for this reason you might be always recalculating your marketing budget, headcounts and direct cost of your sales.
If you’re looking for an answer to the question: “How Much Should a Startup Spend on Advertising and Marketing?”, you’re in the right place!
Let’s Get Started: Check out 3 different approaches to it ?
Three Different Methods
The first two methods are more suitable for early-stage startups which do not have availble track records or past performance of the first few years (eg. Revenue, Conversion %, CPC). The last approach is more suitable for already established companies that have been in business for more than a couple of years. They have available market research and past revenue performance that help to make accurate sales forecast.
1. Look At The Average
This first approach looks at the average of the industry and competitors. Going straight to the point, the suggested average budget on marketing for more established companies should be higher than 10% on expected revenue for the year. Instead, it is around 20-25% of their revenue on marketing costs for younger companies. As typically startups aim to grow constantly it is recommended they allocate a higher amount on advertising.
2. Do The Maths
This method is also used from business active for less than a year. If you don’t have previous years’ revenue figures available you need to get them. It’s notoriously hard to demonstrate Return on Investment (ROI) for marketing costs. Without the right marketing analytics in place you can’t optimize your efforts and your team will end up quickly burning cash.
Here are 3 easy steps to get your first budget:
- Target Cost per Result: this is the amount you’re willing to pay for each new sales or lead. Consider this value to be 1:4 or 1:5 of the AOV. Why? Because a common ROAS benchmark is a 4:1 ratio — €4 revenue to €1 in ad spend. You might apply the same formula to get the ideal Target Cost on Facebook Ads or Google Ads.
- Minimum Target Sales: just guess it! It’s the min. number of sales (app installs or leads) you expect to make in the period.
- Budget: this is the ideal budget: it comes as: (Target cost per Result*Min. Target Sales).
Let’s check out an example assuming we manage an eCommerce selling Bright Speakers: where:
- AOV: €150
- Minimum Monthly Target Sales: 12
- Target Cost per Result: (AOV/4) = €38
- Initial Budget: €38*12= €456
The Initial Budget that equals to €456 is about the 25% of the revenue which is the suggested average budget on marketing for startups included in the first approach above.
3. Analyze Previous Figures
This method is typically used from companies that have been in business for more than 2-3 years. If you have available past and robust business figures, as a Marketing Manager, you will be able to forecast future growth of the company.
What KPI looking at before allocating the budget?
- Cost per Acquisition: “CPA is a metric that measures the aggregate cost to acquire one paying customer on a campaign or channel level”
- Revenue per Visitors: “Revenue per Visitor (RPV) is a measurement of the amount of money generated from each additional website visitor.”
- Customer Lifetime Value: “LTV is an estimate of the average revenue that a customer will generate throughout their lifespan as a customer”
- Single Channel Costs (ROAS): “It measures the efficacy of a digital advertising campaign: (Ad Revenue/Ad Cost)*100“
- Single Channel Costs (ROI): “ROI is measured on a business’ gross profit: (Gross profit – Marketing Investment) / (Marketing Investment)
- Conversion Rate: “The conversion rate is defined by the number of conversions divided by the total number of visitors.”
- Bounce % or Engagement %: “Bounce rate is calculated by the total number of one-page visits divided by the total number of entries.”
But what is an ideal Growth Rate for Startups?
A few years ago, Paul Graham of Y Combinator wrote an article saying that “a good growth rate during YC is 5-7% a week. If you can hit 10% a week you’re doing exceptionally well. If you can only manage 1%, it’s a sign you haven’t yet figured out what you’re doing.” – Learn more about this topic, here.
If you haven’t figured it out yet, a startup is a company designed to grow fast. Almost every company needs some amount of funding to get started and often they raise money to grow even faster.
Said that, marketing budget is also inversely proportionate to the amount of cash a startup have and can afford to allocate. Also, startups raising capital for the next round of funding might looking for a higher growth rate; this means allocate more budget in short term.
To conclude, don’t forget to measure and validate your assumptions testing channel performance against others. Revisit your budget over time allocating more on channels with higher ROAS. For example, Inbound Marketing is 62% cheaper than outbound. CPC depends by countries and seasonality.
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