What is a good budget for digital marketing?

At Workshop Digital, we think a lot about budgeting. There are endless ways to spend your marketing dollars—but what works for one company may not work for the next.

Calculating a good marketing budget in this day-and-age includes historical data, company objectives, strategic priorities, and economic realities. Some companies start with a percent of revenue or a standard increase over the previous year. Other companies start at zero and add up their planned costs.

There is no right or wrong answer. And there certainly isn't an Excel function that spits out an optimal digital marketing budget recommendation. It takes some hard work and a little creative thinking, but companies that start the year with a plan are more likely to accomplish their goals.

This guide covers the four-step process that we use to help our clients forecast, refine, request, and approve their digital marketing budgets:

What to Include in Your Digital Marketing Budget

The first step in figuring out a marketing budget? Understanding why budgets matter in the first place. Of course, budgeting differs between small and large companies and newer and established ones—but they’re equally important. Budgets create discipline and accountability across your marketing department. Somebody is responsible for money going out the door. And you want to ensure you can measure results and hold your organizational accountable.

Well-established budgets also provide guardrails. They enable marketers to take advantage of new opportunities by remaining flexible, while providing you with some direction. They give you some sense of prioritization on how you're allocating your expenses.

Which Metrics Are You Tracking?

To start with a budget projection or forecasting exercise, the first thing you must do is understand which metrics matter. These measurements are going to be based on your business objectives. Therefore, you must understand your goals. They may center on online sales, lead generation, or a combination of the two. You have to understand how to measure them. Then, you have to know how to gather data to make a more informed projection about how you can allocate your dollars next year to drive the biggest impact.

Incorporating All Your Costs

One mistake that we often see at this stage is when teams forget to incorporate all of their costs into the mix. Considering the all-in cost of a marketing strategy includes things that you may not normally think of as a marketing expense, including:

• Training & development
• Software & Marketing Technology (MarTech)
• Staffing & hiring
• Agency or consultant partnerships
• Ad spend

Ad spend is often the most common expense in a marketing or advertising budget—so you need to make sure you’re considering the analytics and testing tools you’re using to measure and optimize your campaigns.

Once you consider all costs, it’s time to consider what you’re measuring. Ideally, you should measure and optimize internal conversions and revenue based on metrics that grow your bottom line. It’s true that you can consider historical data and trends, and external factors like industry benchmarks and competitive activity. However, you want to get as close to revenue as possible. You want to focus on what's going to happen to your business, not the marketplace.

Calculating Cost Per Conversion & Revenue Per Customer

When approaching conversion and revenue data, you’ll typically consider cost per acquisition—or, the cost it takes for you to acquire a customer. This metric helps identify how much you need to spend to gain one new customer, lead, or online sale. It’s also important to dig a little deeper and uncover lifetime value. This means understanding the sales life cycle of your customers. And finally, you’ll want to determine return on investment (ROI) or return on ad spend (ROAS) to fully understand how well your marketing program is working.

Unpacking The Influence Of Historical Data & Trends

A lot of times, forecasts and projections are also influenced by historical trends. You can base your decisions on what’s happened in previous years, and factor in the impact of seasonality or other significant changes that you project will happen again. This may include:

• Sales or promotion periods
• New website launches that could impact performance
• New campaigns in the marketplace that could drive different results or different customers into your funnel

Understanding Your Industry Cycles

Finally, it’s important to consider external factors when constructing strategies. This may include industry-specific research or benchmarks from trade groups, associations, or publications in your space. They can also include things that happen in a macro-economic capacity, such as a recession or spike in the economy. Make sure you are creating paid media and SEO strategies that account for these sort of economic uncertainties. Ultimately, it’s important to be wary of external factors—as they should inform but not dictate budgets.

Finding The Point Of Diminishing Returns

Lastly, you need to check assumptions, as there are other factors that come into play. Make sure you’re thinking through all the opportunities available over the next year. At some point, each incremental marketing dollar invested is going to yield fewer sales or conversions. This is called the point of diminishing returns. When you hit diminishing returns, you must look elsewhere to allocate your next marketing dollar to ensure that you’re not losing potential ROI.

A smart budget is one that’s flexible, elastic, and able to take advantage of opportunities as they arise in the marketplace. This could manifest itself as a tactical campaign. It could also mean testing new channels to find ways to generate sales, leads, or conversions on our website. Regardless, you should always build in some flexibility and not assume that a budget that’s set today is going to be as ideal in six to 12 months.

Digital Marketing Budget Averages

Even though your budget will be customized to accomplish your specific goals, sometimes it's helpful to look at other data points across industries as a benchmark. Let's look at a few stats from the September 2022 CMO Survey:

• 42% of marketing leaders surveyed plan to decrease their marketing budgets due to inflationary pressures. 41% expect no impact on marketing spend and only 17% will increase their marketing spend if inflation remains high.
• Marketing expenses account for 13.8% of overall company budgets, representing an all-time high in the CMO Survey data and supporting the importance of marketing in organizations. Note that this is 8.7% of overall company revenues. So if you're not budgeting 9%+ of revenues for your marketing, you may risk losing ground to more aggressive competitors.
• Digital marketing budgets are projected to increase 10.1% in the next 12 months, on top of a 15% increase over the previous 12 months.

How to Create a Digital Marketing Budget

At Workshop Digital, we've encountered numerous budgeting scenarios over the years. No matter the situation, however, forecasting and presenting budgets and getting them approved requires a little bit of science and a little bit of art.

On the scientific side, we know that budgets must be accurate and relevant to a company's goals and objectives. Because budgeting and getting approval is a human process, it’s important to speak to your stakeholders in a way that they understand. Therefore, you must present asks in a way that’s going to be well-received. This requires some thought about how they're thinking and how they make decisions.

Presenting budgets to stakeholders is all about alignment. Sometimes, you must devise a few different ways of presenting budgets. Let’s review some of these methods.

1. Scenario-Based Forecasting

Scenario-based forecasting takes previous data, and creates good, better, best (or, gold, silver, platinum; or, low, medium and high) options. This data is based on what you did last year or last quarter. It compares what it’d look like if you add X percent—say, 10%, 20%, or 30%—and it tries to figure out how you scale up what you’ve done based on historical results.

In these situations, we find that marketers often gravitate towards the safe, middle of the road option. They may not feel like there's a wrong choice—as long as they're not picking the option that's either too low or too high. While this can be effective in some situations, it can also result in missed opportunities. Ultimately, playing it too safe may leave things on the table.

2. Zero-Based Budgeting

The second common strategy we see is zero-based budgeting, which goes by different names. Sometimes people just say, “Give us the blue sky option,” or, “Tell us how much we should spend.” Our favorite is, “If we have positive ROI, then budgets are infinite from a marketing perspective.” While these inputs are not always extremely helpful, sometimes it’s the only way to go if there aren’t enough historical benchmarks or data to make accurate projections.

3. Testing, Learning, and Refining

Our favorite scenario is almost always when we can test, learn, and refine budgets in real-time. This iterative, experimental approach starts with a small budget—perhaps in a new channel or a new series of channels—and figures out the best way to allocate it across channels over time.

In these scenarios, you learn what's working best, so you know where to invest more of your budget throughout the year. It also illustrates where you pull back in areas that are not as productive. This is a quick way to learn, as you’re able to structure tests with a full marketing budget. Or, you can carve out a small percentage of your budget for ongoing testing and experimentation—which can also help inform future budgeting processes.

4. Bonus Round - Use It Or Lose It

We’ve also seen a fourth scenario that we’ve named the bonus round. This is typically prevalent in the fourth quarter of the year where people have a “use it or lose it” mentality. They've got their line items carved out for the year. And if they don't spend it before December 31, it's gone.

In these situations, you run the risk of leaving revenue, sales, or leads on the table—which can be wasteful and inefficient. In this context, use it or lose it budgets a whole different opportunity for testing and experimentation. Rather than just dump more money into existing channels, you can figure out how to use budgets more intelligently. Even if you’re not actually carving out budgets at this stage, this is a good time to gain some insight to help inform next year’s strategy.

Observe the Trends

It’s important to understand the larger environment you’re operating in. And it’s important to observe the trends in your industry or competitive set.

The 2022 CMO Survey reveals that marketers are increasingly prioritizing economic incentives and price competition. In addition to spending more in digital channels, they’re investing in measuring performance and focusing on the customer experience.

• Marketing budgets are expected to grow by 10.1% in 2023.
• Investments in analytics will increase by 63% in the next three years.
• Marketers are prioritizing excellent service (18.5%) and product quality (30%) in addition to offering the lowest prices (17.5%) compared to last year.

Consider these data points as you allocate your budgets. For example, make sure you account for an increase in spend on tools that will help measure the results and improve the results of your campaigns. Falling behind competitors can lead to shrinking market share.

Sometimes you can't just dump more money into ads to outspend your competitors. And often, you can't always compete on price, especially in a world dominated by Amazon or Google. Instead, you can focus on providing excellent customer service and high-quality products. This helps create brand advocates and keeps people coming back to your company.

Show Your Work

What does it mean to accomplish your goals? How do your goals ladder up to business objectives? Showing your work will help you get budgets approved. Know exactly how you're going to measure results—and which tools you’re going to use to obtain your established KPIs.

Make sure you're also building in an appropriate amount of diminishing returns. Not every dollar spent is going to yield the same return as you increase your budgets. So, think about how that's going to impact your overall return. And finally, the most obvious—but often overlooked—factor is explaining the “why” behind your work. If you're able to communicate why you're doing something, and the rationale behind your decisions, you're more likely to get approval.

Challenge Your Assumptions

We often hear, “If we spend 10% more money, we’ll get 10% more sales.” Because budgets are not always linear, this is not always true. What works today isn’t always going to work tomorrow. Therefore, it’s critical to factor in potential disruptions in your market. It’s important to know what industry- or platform-specific variables you must factor in. Alternatively, you can prepare a contingency fund budgets to make sure you can counteract any market forces that may arise.

As we’ve already mentioned, budgets are not meant to be static. You must make sure they're nimble and agile—so you can respond in real-time to changing market conditions.

What do you do when your digital marketing budgets are approved? And how do you ensure you’re taking full advantage of your options? Let’s review.

3 Ways to Derail Budget Decisions

We partner with companies that have a wide variety of budgeting processes. No two are the same. While it's hard to say what's going to work in every situation, we do see some common pitfalls or scenarios that can totally derail the process. Here are some ways to avoid or preempt some of these situations, so you can negotiate, refine, and get approval on your budgets.

1. Trying to do everything at once

The first pitfall we’ve seen involves biting off more than you can chew. Budgets are always finite, regardless of organization or opportunity size. It’s important to allocate your budgets based on what you think is going to have the greatest impact on your business. Look at what you’re able to accomplish with what you already have at your disposal. Make the best use of the resources you have available—whether that's people, software, training, or brand equity.

2. Changing priorities or objectives late in the game.

If you're still establishing business objectives or strategic drivers at this point, you're doing things in reverse. As we’ve already mentioned, you want to start with a clear goal or objective in mind. If you're doing it the other way around, we strongly consider going back to square one and start by defining your objectives, developing strategies, and then coming up with a budget to support them. Otherwise, you're gonna find yourself constantly chasing your own tail.

We often see clients with a pool of money and no idea where to begin. So, they spend it on a variety of things to see what sticks. What you’re looking for is a strategy based on your own circumstances—not necessarily what's worked for somebody else or what you've read. Do what's right for your business. It takes discipline and research to establish your priorities.

3. Sticking to “the way we’ve always done it.”

The final pitfall we see is when companies get stuck in a rut and do things just because they're comfortable with the approach. While assuming you’re going to spend the same as last year—or use the same channels, strategies, or tactics—may be an easy path to approval, we encourage our partners to push outside their comfort zones.

Don’t just assume that what worked last year—or five years ago—is going to work this year. Marketing agencies can provide data and insight into channels and strategies that push you outside your comfort zone. Therefore, you can learn and grow beyond where you are today.

Your budgets are approved. Now what?

You've gone through the harrowing process of getting the right stakeholders to approve your budget requests. You've got a pocket full of dollars. And you're ready to go out and start buying. So, where do you begin? Below, we highlight some best practices that can help improve your chances of success.

1. Stay focused on your goals.

Pay attention to what's going on in your market and to what your competitors are doing, but don't deviate from your strategies. If your competitors change course, or do something you aren’t expecting, it doesn't mean they're doing it the right way. Don't jump ship and change strategies if you believe in what you're trying to accomplish. Changing your priorities or goals too late in the year—or too late in the budgeting process—means you’re disregarding all progress and starting from scratch. It takes time for strategies and tactics to take root.

On the flip side, however, a lot can change within a year. You must pay attention to what's going on in the marketplace and periodically—whether it's every quarter or every six months—reevaluate the path you’re on. This is the time to analyze whether you’re making progress towards your predefined objectives or milestones.

2. Build in measurement and insights.

Far too often, we’ve seen clients jump into a situation by chasing a shiny object. They install tools to solve problems that are fundamentally solvable by people. In today’s data-driven world, it’s easy to ignore human judgment and intuition and want to immediately seek out a software solution to every problem. While technology is great, it’s not the only way to go about measuring and generating insights from your marketing channels.

Consider how your measurement model is going to adapt around your new strategies and your new budgeting allocation. And don't just look at it as a 12-month plan. Break it down into more manageable chunks—whether that's monthly goals or quarterly targets. You need an indicator of progress when seeking towards those goals, so you can measure and refine as needed.

3. Don’t “set it and forget it.”

It’s easy to get complacent. We all get busy. Plus, when you launch something big, it’s easy to move on. This is actually the best time to study what's working and what's not. Analyze your attribution model to ensure you’re optimizing things accordingly. Jump on new opportunities or defund strategies that are not working. Leveraging data helps ensure you're making wise budgeting decisions—not just once, but throughout the year.

The fourth and final section in our series addresses some of the most common budgeting questions we've heard from clients, partners, and others in the industry. If you’re a frequent reader of our blog, you may recall that these budgeting FAQs were featured in a recent post. For more insight and information—and more questions—we recommend revisiting that blog.

1. How much should we spend?

This is by far the most common question we get. The answer? It depends.

Partnering with a digital marketing agency can help you make an educated guess based on your circumstances and your opportunities. First and foremost, we’ll work to establish your goals and objectives to understand if you're trying to drive website traffic, qualified leads, sales, or new customers. Together, we’ll identify your ROI or ROAS goals, so we can work backwards and stitch together data points to identify real opportunities based on your unique situation.

2. Why do we ask what your budget is?

Shouldn't we be able to put together a plan without knowing how much you want to spend? Not really. Knowing your budget helps illustrate what's feasible and realistic—and what kind of opportunities we should explore. As we’ve already established, budgets are finite. So is our ability to execute. Therefore, we need to ensure that we're not setting unrealistic expectations.

We ask for budgets not so that we can determine how much to charge you up front, but so that we can make sure we're playing in the right arena and able to bring you the best, most comprehensive strategies that are both realistic and achievable.

3. We can't afford to do it all. Where do we start?

This is true for just about everybody—so don't feel bad if this is your situation. It doesn't matter if you're IBM or just opened your doors last week. No company can afford to buy all the media, ads, clicks, or impressions. It's just not possible. You've got to start somewhere.

Once you've established a ballpark range for your budget, we’re able to marry that with your objectives to figure out what's going to provide the best chance of accomplishing your goals. Many times, we want to start small and iterate. We're often going to recommend different types of strategies that we can bring to bear across different channels.

Knowing which digital channels make the most sense for your situation is tough without without understanding your business, your audience, and your potential customers. Once we understand your objectives—and what you're trying to accomplish as an organization—we can leverage the right strategies to reach your audience in a meaningful, valuable way.

4. Why is digital marketing so expensive?

It’s true that digital marketing can be expensive. But its return on investment and analytics capabilities more than justifies the price tag. Whereas a lot of traditional media cannot display a direct impact on your bottom line, digital marketing is trackable and targeted. It can identify audiences and reach people that are most likely to purchase or learn more from you with high degrees of precision. And often, that extra degree of accuracy comes at a slightly higher cost.

5. What’s the difference between ad spend and management fees?

Ad spend is the dollars you're paying to your digital marketing channels. In our case, this generally means Google Ads, Facebook/Meta Ads, or a display or programmatic ad network. Simply put, you're spending dollars to drive clicks or drive impressions.

With this comes agency management fees. While many agencies will lump these fees together with the ad spend, at Workshop Digital, we charge flat, retainer-based monthly fees that are predictable and transparent. We believe in separating what you pay directly to channels like Google or Facebook/Meta—and we’re responsible for being good stewards of your advertising dollars. This means allocating your budgets wisely and managing your campaigns responsibly.

We don't bundle the two and we don't try to mark up the fees that we're charging. But we do want to be transparent and fair with our pricing, so you can see what you're paying for media and what you're paying for management. Empowering you to see where your dollars are going enables you to make better decisions as you're prioritizing and budgeting in the future.

Still have questions? We'd love to hear from you. We’re happy to answer any questions or look at specifics in your budgeting situation as you're thinking about this year and beyond.