At the ClickZ Live conference in New York, Michelle Killebrew presented an interesting case study of an IBM campaign called “Rethink Business.” It got me thinking (or, should I say, rethinking?) about campaign budgeting. My question is: How do you set a budget for a multi-touch, multi-target B-to-B digital campaign like the one Michelle was describing? The short answer is: Spend as much as delivers your threshold level of ROI. In other words, if Michelle’s campaign is generating qualified leads that convert to sales at a return that pays for themselves, covers her overhead, plus leaves a profit for IBM, she can keep the campaign running until the cows come home. Or until the campaign fatigues, and dips below the required ROI hurdle rate.
But, in B-to-B, it’s not so simple. Large enterprise sales cycles are long, as much as 18 to 24 months, so Michelle’s sales results won’t be available until long after she needs to make campaign decisions. And some of those results may never be known, since the leads are likely being worked by third party channel partners, who are often reluctant to share sales information.
Plus, Michelle said she had other objectives in mind for this campaign other than leads. She wanted to create digital experiences for prospect engagement, and she wanted to demonstrate the use of IBM’s proprietary marketing tools.
So in B-to-B, budgets are often set at a higher level than campaign ROI. Here are five methods that B-to-B marketers may be using to set marketing budgets.
- Percentage of last year’s budget. Take last year’s budget and subjectively add or cut, to arrive at a figure for this year’s budget. Can be applied by periods other than a year, like the quarter. Not based on much logic, but in common practice.
- Percentage of sales. Calculate a percentage of expected sales in the coming year; 4 percent is common in B-to-B for large, mature companies. Avoid using last year’s sales volume as the basis for this calculation. If last year was a bad year for your company, you won’t have a large enough B-to-B marketing budget to meet your growth goals in the coming year.
- Percentage of selling cost. A variation of No. 2, where the denominator is sales salaries and commissions, instead of revenue. You might see percentage levels like 20 percent to 30 percent with this method. It neatly reflects B-to-B marketing’s role as an efficient driver of sales productivity.
- Match your competition. In a high-growth, fiercely competitive stage in the product life-cycle, keeping up with your competitors may make sense. If you can find out what they are spending, which may require some clever intelligence-gathering activity.
- Zero-based budgeting. In this method, you determine your specific marketing goals, tied directly to business objectives. Then, you figure out what you need to achieve your marketing goals. For example, say it costs $350 to generate a qualified SMB lead that will convert to sales at 20 percent conversion rate. To bring in 3,000 SMB customers in the year, we need $5.2 million budget ($350/.2*3000). Clear and accountable.
Zero-based budgeting is the best way to go, in my view. You have a firm grasp of the numbers, and you are delivering against business objectives. With this approach, you can take you plans anywhere in the organization, and explain what you’re doing in a way that is meaningful to everyone.
A version of this article appeared in Biznology, the digital marketing blog.