Budgeting for Digital Marketing: Optimization Tips

With endless ways to spend your marketing dollars, allocating budgets in the digital space can be a struggle for brands and marketing professionals. Over-allocate to the wrong channels and you risk wasting money on tactics that don't produce qualified results. Under-allocate a high-performing channel and you miss out on valuable opportunities.

So, what's the best way to avoid mistakes in spending and ensure you get the most from your available marketing dollars? To help, we share some common difficulties with setting digital marketing budgets—and provide tips on how to set and optimize your budget. We also put together a digital marketing budget blueprint to figure out how much to spend to reach your marketing goals. Let’s dig in!

Table of Contents

Budgeting for Digital Marketing is a Journey, Not a Destination

Why Create a Digital Marketing Budget Plan?

How to Budget for Digital Marketing

Informing Your Digital Marketing Budget

Optimizing Digital Marketing Spend

Budgeting for Digital Marketing is a Journey, Not a Destination

Many people treat digital marketing budgets like New Year’s resolutions: they set them, they get excited about them, and then they fail to stick to the plan. 80% of resolutions will be abandoned by February and only 8% of total resolutions are accomplished by the end of the year. We can help! Let’s walk through some of the ways to figure out what a good digital marketing budget is.

We aim to answer the digital marketing budgeting question in many ways but it stems from the most common questions we get in a discovery and kick-off process with our clients: how much should I spend on digital marketing? Or, how much should my marketing budget be in general? We have a lot of different sources for that information, so we have to start to address that question and typically it comes down to my favorite answer: "It depends."

There are a lot of different data points, ideas, and schools of thought on how to set marketing budgets. We propose backtracking and starting with your business objectives to ensure we're answering the questions that matter to your business. We recommend starting with your goals, your objectives, and your targets. From there, you can start to develop strategies and tactics around that, that ultimately lead to revenue. If we can't tie your goals and objectives to an increase in revenue, or whatever your business objectives are, then our strategies, tactics, and budgets aren't that useful for you as a business, and ultimately the budget will most likely go to waste.

So in our journey today, we're going to talk through several key topics related to setting budgets. First of all, why is it even important? How do we consider different factors when we're setting our budgets? What do we need to consider when we're setting a budget? And then how do we roll all of that together into a more informed digital marketing budget? And finally, we're going to share some tips on how to get started.

Why Create a Digital Marketing Budget Plan?

First and foremost, why do we need to set a budget? This should be obvious: we're all in business to succeed and grow and accomplish our objectives. Setting a budget is simply a way to plan and ensure we're allocating enough resources to accomplish what we need to accomplish. It's not exactly a glamorous task but it is an important part of planning for success and we can do it with a little bit more discipline and rigor than simply throwing numbers up on a wall.

Why do marketing budgets matter?

Budgets matter for a lot of different reasons. They can be used to justify investments to our stakeholders; we have to set measurable objectives in order to define success for those stakeholders. It is important to make decisions based on data, not opinions.

It is also important to allocate resources based on the expected return on investment to prioritize tactics or strategies that yield the best results.

We have to retain some flexibility in our budgeting and strategy process to ensure we can scale up to capture demand when there is an incremental opportunity. We also want to be agile so we can deploy new tests and learn new things along the way without being stuck in a rigid structure or budget for the year if it doesn’t allow us to anticipate or plan for changes in the digital landscape or competitive market.

How to Budget for Digital Marketing

So while we're factoring all of these into our budgeting options and processes, we have to think of some of the other considerations we need to plan for. To do that, we looked at a lot of industry research. We can start with what other marketers—what other senior-level marketers—are doing to project their budgets ahead into the coming year, and there's no better source for us right now than a survey of CMOs and senior-level marketing executives by the Duke School of Business, the Deloitte consulting firm, and the American Marketing Association. They've combined their resources and methodologies over time to survey senior-level marketing executives about their levels of optimism and enthusiasm for increasing their budgets in the coming year based on what they're seeing in their businesses today and what they see in the marketing landscape for the year ahead.

We know that the internet and digital marketing in particular is getting more competitive. More of our competitors are coming online, they are increasing their budgets, and they are generally seeking to acquire the customers we already have or gain impression share or market share where it exists.

Over the next 12 months, marketers are expecting to spend about 8% more on digital marketing than they had in the previous months. They're allocating more resources and in our budgeting processes, so we need to be aware that we can start to spend more to gain more and we should not consider the status quo or previous years' budgets as any indication of what we should be spending going forward.

When we look at that overall 8% increase in marketing budgets, we can see that it's heavily weighted toward digital marketing. Ultimately, we’re seeing an increase in spend on digital marketing, versus the flat to negative projected spend in more traditional marketing channels. This does vary by industry, but we expect to see higher growth in spending in more competitive segments, such as banking, finance, and insurance.

Another critical component in setting a marketing budget is factoring all related expenses and overhead in addition to the ad spend. As marketers, we're really good at forecasting how much we can afford to spend in advertising channels. However, we're less effective at planning ahead for some of the other costs associated with our marketing strategies, such as analytics tools and software, marketing research, training the employees, the overhead, and the staffing plans that we need to execute on these strategies.

When we take all of these factors into account, we have to make sure we're looking at the big picture and budgeting for each of these increases over the coming year. Another helpful tip is to look at industry averages or company averages across entire industries to figure out what percentage of our overall revenue should be allocated or are allocated to marketing expenses. On average, it's about 10.1% of gross revenues for a company are applied to marketing expenses. This is a baseline, it doesn't mean some companies should be spending more or less. It simply means that across all industry segments, about 10% of the company's gross revenues are reinvested back into marketing efforts.

Informing Your Digital Marketing Budget

When we start to look at what we need to do today to start planning our budgets for next year, as I mentioned, it is important to start with your objectives. Figure out what Key Performance Indicators, or KPIs, are tied to your company’s success. Look at how you can measure those and what you’re going to do with that data once you get it. Most importantly, in any organization, you have to define who the accountable stakeholder is. This is the number one mistake we see people making: setting a goal without holding any team, department, or individual accountable for hitting that goal. When nobody owns the goal, it doesn't get done and everyone has an excuse to hide behind.

Timing & Duration

We set our objectives, but we should also put some time constraints around it: What do we want to accomplish, and by when? Sometimes it's an annual goal, sometimes it's a quarterly or monthly target. We need to define that ahead of time to know what we're aiming at and what we need to prioritize.

Risk Tolerance

We have to assess our own risk tolerance: Do we have enough budget, do we have enough resources to take a scattershot approach to test multiple approaches at the same time? Or do we have to keep enough powder in the reserve and only focus on one or two opportunities at a time so we don't spread ourselves too thin?

Competitive Pressure

Competitors always play a big role in budgeting decisions. I wouldn't base your decisions on what your competitors are doing, but we need to know if we expect competitors to be more or less aggressive in the coming year and what opportunities or gaps we might see in their strategies that we can exploit that may help inform our budgeting process as well.

Data & Analysis Requirements

We need to take into consideration the amount of data, and the types of analysis that we want to perform. We should ask ourselves these questions: What do we want to learn? What kind of data do we need to collect? How do we want to store it? What questions am I looking to answer?

Target Audience Behaviors

We need to understand more about our target audiences: Where are they going online? What are they browsing? What social media and content consumption tools are they using?

Analytics Tools & Methodology

What kind of analytics tools and data capture methodologies do we want to use? How are we going to take advantage of those to gather the types of data that we need? What's the cost upfront and ongoing with those investments?

Visitor Acquisition Costs

How much is it going to cost to acquire traffic, this is typically represented in a cost-per-click (or CPC model), or cost per thousand impressions (a CPM model), depending on the type of advertisement we're buying and it is the most common form of advertising expense.

Staffing & Training

Of course, we have staffing and training needs, we have marketing team employees, we have agencies, and we have the training, onboarding, and systems that go along with supporting those teams.

Testing & Optimization

As marketers, a lot of us overlook the testing and optimization investment that needs to be made to continually refine the use of our budgets, refine our ad spend, take a measurement-driven approach to build our strategies, and iteratively implement them over time so that we can test and improve our way to better results.

When taken as a whole, all of these factors can help us build a more informed marketing and budgeting process so that we can make better and more educated decisions about what we're going to do in the coming year.

Optimizing Digital Marketing Spend

Now that we've established a digital marketing budget, we have some guidelines for what we project to spend in the coming year. We have to take into account the opportunities that we have to optimize that spend over time as we gather data. Budgets, inherently are fluid and can be reallocated, especially in the digital space to the channels that are working best to provide the best return on investment. Budgeting plans should include some flexibility to reallocate funds as needed to take advantage of opportunities and cut your losses.

To do that, we look at a couple of different methods and factor this into our planning and prioritization decisions. We have to test multiple channels, there's no silver bullet in digital marketing and what works for one advertiser may not work for another. Therefore, we have to look for ways to compare apples to apples across digital channels by comparing performance against the KPIs that we established earlier in our budgeting process. We should be looking at these results side-by-side and look for the outliers: Where are we getting a better cost per conversion? Where might we have a higher conversion rate? How can we capitalize on those opportunities?

We also have to factor in, as best we can, customer data and lifetime value. What are we most likely to sell? What kinds of leads are generating the highest return on investment? If we're in an Ecommerce environment, where can we maximize lifetime value if we allocate more marketing dollars toward this specific channel? One of the best parts about digital marketing is, because everything is measurable, the ability to define an attribution model and assign a value to each of the touchpoints in our digital marketing funnel ensuring that we're properly optimizing our budgets and our strategies to take advantage of each of those touch points along the visitor journey.

How to Get Started

The first step is making sure we're investing in all of the right channels, and every business is different, no two strategies are going to look alike.

We've curated this comparison table as a simple high-level overview of the various digital marketing services that you have access to and how they rank against each of the budgeting considerations that we looked at earlier: time to market, risk factors, the availability of data and analytics, how granularly we can target specific audiences, and relative costs and fees associated with each of those channels.

For example, we can look at paid search campaigns, or PPC campaigns, and see that we can have campaigns up and running relatively quickly and gather a lot of data with very granular audience targeting capabilities. However, because it's a paid channel, costs tend to escalate and can increase over time as we allocate more budget and take advantage of new opportunities. When we're looking at paid opportunities like paid search, display advertising, or even paid social advertising, it helps to start with our objective in mind and one of the ways we can start to establish a budget is to look at how much can we spend, how much can we afford to spend to acquire visitors or traffic to our site? Assuming that these are all qualified visitors or likely sales prospects, we can start to do some basic math to figure out how much we can allocate and afford to spend to acquire a particular visitor.

Going back to high school math for a moment, we need to think through some of the basic equations that can help us establish a budget. In this example, we are looking to close 10 sales per month. As a sales-based organization, and we know from our historical experience that we typically close about 1 out of 5, or 20%, of the leads that come through our website. In doing the basic math, we would need to acquire 50 leads per month through our website.

From there, we can start to answer the question: how many qualified website visitors do I need per month to generate 50 leads? We take our goal of 50 leads needed and we can start to calculate how many visitors we need to our website in a given month to hit that objective. With the 50 leads, we know that our site converts about 1 out of 20, or 5%, of visitors to a qualified lead. In doing the math here, we would need about 1,000 visitors on our website each month that fit our target market or target profile.

Depending on the strategies and tactics we're deploying, we can estimate how much traffic we need to go out and purchase or acquire. In a paid digital marketing channel, such as search, display, or paid social, we typically buy ads on a cost-per-click basis. For 1,000 visitors, we know that we would need to purchase about 1,000 clicks. However, if we're buying ads on a cost-per-thousand basis, we know we need to go out and acquire impressions and typically that's done based on the expected click-through rate that our ads would achieve. If we expect a 3% click-through rate on our ads, those thousand visitors are going to require about 33,000 impressions, based on the cost-per-click model.

Based on the cost-per-click model in paid search or paid advertising, we can estimate about a $5 average cost per click. To acquire the 1,000 visitors we need at $5 a piece, we need to spend about $5,000 on paid media to drive enough qualified visitors to our site to generate enough leads to, in return, generate enough sales for our business. When we do the math backward, we can calculate about a $500 cost per acquisition to acquire a new customer.

Depending on if you're selling cheap low-cost widgets online that are a commodity, or if you're selling high-end, strategic consulting services, your cost per acquisition target will vary. However, this is a math model that you can plug and play different numbers and scenarios into to see how much you can afford to spend as a whole and then acquire particular visitors. As you gather data, your campaigns evolve, and your strategies develop, start to adjust these variables to figure out what you can do to improve your results.

This blog post was originally published on January 9, 2018, and was updated and republished on May 30, 2024.