While developing a new product, project management expenditures play a significant role in final costs. Apart from administrative, general, or labor expenses, marketing is a vital component in the costs section of the budget spreadsheet. Developing a marketing budget for startups is challenging. Yet, what I find most surprising in my daily interactions with startups is that the reason is often one of two types of wrong assumptions.
Wrong assumption #1: Marketing is a cost that cannot be easily converted into revenue
Still, too many old-school managers, even in well-established companies, value a traditional sales model relying on sales reps. They frequently have difficulty adapting to cognitive changes and treat marketing as metaphorical wrapping paper coverings provided goods. In this approach, each marketing effort aims to present the product on numerous occasions (in offline or digital channels), end of the story.
Yet they have no clue how marketing may bring the business closer to completing any deal, not to mention driving the company’s growth process. They may be able to imagine how it works theoretically but still don’t believe in a predictable conversion that can be anticipated. It is getting even worse in B2B complex product offerings, where decision-making is not always quick or straightforward. Although there are now more new-generation startup founders, many perceive marketing as a pure cost, particularly in non-digital technologies.
Today, it is possible to determine ROI from marketing using data. And with prior budget completion input, startups may plan future marketing expenditures, allocating a specific share of planned revenue. Hence, if a startup spent 11% of its revenue on marketing in 2022, it may want to anticipate devoting an identical percentage in 2023 to get the same financial result. But in such a scenario, marketing expenses always become just a cost, with a mysterious connection to a forecasted revenue, but without forecasting a specific ROI.
Wrong assumption#2: Marketing is an extension of sales or product promotion that exists only to serve essential resources
This aspect is particularly relevant for startups focusing on the B2B market. Also, since salespeople are perpetually involved in closing deals, and sometimes it’s even hard to win a contract without personal interaction, marketing is considered a servant to sales. Another challenge is that in some cases, also in digital businesses like SaaS products, it’s surprisingly simple to lose track of marketing and put too much emphasis on the product. Among good organizations that have a marketing process properly structured and address all of the stages of the customer journey, it is pretty natural that there is always a demand for new marketing assets supporting sales or promoting products. But, such reasoning might be damaging when a startup is in its early stages.
Startups should always prioritize marketing since it shapes a conversion funnel and needs to be leveraged to generate sales opportunities, while validating the product to get valuable input.
When I challenged Kasia Zalewska, an impact angel investor, about startups’ budgeting concerns regarding marketing, she noted that marketing is not the first thing that comes to mind for founders, which is why the best way to handle proper marketing budgeting is to seek assistance from an experienced CMO.
I wish marketing problems would be introduced to startups before the product MVP is planned to be delivered. A comprehensive marketing strategy should be established early to design a startup’s commercial success. If a startup overlooks it, the product may end up packed in advertising wrapping paper rather than being marketable.
How to get the marketing budget for startups right
Money always comes first
As mentioned before, budgeting marketing for a startup must be linked to an adequate and accurately forecasted ROI. Even if the role of marketing is not critical for every startup (as in B2C), proper budgeting is always essential. All marketing platforms, whether selling to individuals or enterprises, allow tracking of almost everything. Therefore, gathering the required data is not a tough challenge these days. The main issue is planning and budgeting marketing to align it with revenue flow.
Regarding the customer journey, startups, particularly those with limited funding, may not have the luxury of marketing to all customer journey stages. There are potential clients on the market who are unaware of the offer and their problems that need solutions (awareness stage), those who are aware of their problems but are not yet willing to buy anything (consideration stage), and those who are active buyers searching for the most suitable offer (conversion stage). Before planning a marketing budget, each startup needs to determine its short-term priorities to allocate its resources adequately to each step of the customer journey.
Spending on a product or brand awareness is necessary in the long term, but startups are constantly in a rush, and it is not such a good idea to invest in a reach at this moment of business growth. As a result, money should be put first in the consideration and conversion stages.
Hence, when determining how to distribute a budget, the primary consideration should be where marketing and sales leads come from. Invest in marketing initiatives likely to result in a massive lead pipeline. Don’t overspend on creating diverse content for each customer journey stage and don’t spend money on awareness campaigns. When you’re on a restricted budget, stimulate organic growth instead of buying it. Furthermore, don’t waste advertising dollars on assets that can’t be leveraged as lead magnets.
Effectively managing a startup’s marketing allocation
The key is to understand the suitable conversion model. What if the startup does not have enough back data to know how the marketing-sales funnel works regarding conversion? In such a situation, developing a most realistic conversion model is necessary. Creating several models for every scenario might be even better: negative, neutral, and positive. Such models should assist with comprehending how the leads convert from one phase of a client’s journey to the subsequent one.
For simplicity’s sake, assume that the startup is selling a SaaS platform to enterprise clients. Potential clients reach the product advertisement through initial touchpoints. The number of interactions summarizes all views of the startup’s marketing materials in every channel. Their viewers may be converted to marketing leads when providing their details as a consequence of interacting with the content. The number of marketing leads expected to convert to sales leads, for example, by asking for an offer, may also be predicted. Finally, some of the sales leads may become clients. All conversion rates may be calculated or modeled based on data and presented as percentages. When developing a conversion model that flows through the whole marketing and sales funnel, it is now possible to understand where the money comes from.
Top-down budgeting based on actions
When you have a conversion model developed, it is an excellent opportunity to apply top-down action-based budgeting. Don’t distribute expected revenue blindly, allocating a portion to marketing. Instead, calculate how many deals must come from marketing activities for the company to meet the expected revenue. When you know conversion rates, it’s pretty simple. When implementing an action-based method of modeling the budget, you will eventually get even an exact number of views in each communication channel needed to generate marketing leads that should come from it. This method of setting a marketing budget is considerably more startup-friendly. When a startup understands what exact outcomes to expect from every marketing action, it can precisely calculate what resources are required to achieve it, together with the associated cost.
However, this method does not apply to businesses whose primary aim is brand recognition rather than customer traction. But, this is not the case for most startups operating on a restricted budget. Obviously, if the startup has considerable flexibility and may also spend some money on awareness-related marketing efforts, the expenditures may consistently be increased. But, having a budget that determines the number of inputs needed to support the targets, a top-to-bottom approach can make managing much more manageable.
Startups need careful budgeting decisions and emphasize getting their foot in the door first. Following the suggestions above, marketing may be designed to be essential in such a context.