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Let’s talk about the importance of budgeting. As Joe Biden the VP of the U.S. said, “Don’t tell me what you value, show me your budget and I’ll tell you what you value.” What does that mean? You basically put your money where your mouth is. As an organization, if you have a series of strategic priorities, you want to be ensuring that you’re putting money behind the key strategic priorities that you have as a business. One of the most obvious ways to tell how an organization values its priorities is to see where it’s spending its money.
There are some key components as you think about budgeting.
Clearly, people are a massive element of that. People is a huge part of the cost of any organization, and having the right people with the right skills is absolutely vital to ensure that you’re able to achieve your objectives. And you need to reward those people, you need to compensate those people; there are costs associated with those people, so it’s a really important part of any budget process.
As we move into an ever more connected world, as IT demands become ever greater on organizations, as organizations go through digital transformation affecting every aspect of their business, IT becomes an increasingly important component, both in hardware terms, but also in software terms, database management, and so on. Also you’ve got to think about materials from a budgeting point of view. Not just the unit cost of producing materials, obviously, that’s a critical component of budgeting. But also the development cost that’s gone into materials over time. Think about pharmaceutical companies – for example, the amount of R&D investment that they’re making in the development of a drug – and they need to ensure that their budgeting is reflecting the overall cost of developing that material before they’re even actually producing it.
You have to be able to spend money to achieve various things in any budgeting process with external agencies – to buy advertising and so on.
And then finally, and perhaps most importantly, the cost of time. Time is often difficult to quantify from a budgeting point of view, but it’s really important to factor in the amount of time that something is going to take, and the cost that’s going to have for the organization. Similar to what we talked about with the pharmaceuticals example, maybe 20 years to develop a drug, but also time taken to develop creative materials, time taken to be able to develop a successful marketing implementation. That’s also a really important component of budget management.
A budget is usually made up of four key elements:
You need to consider a number of factors.
The number of people on your team, the skills of the people on your team, and the cost of having those people on your team. You can see on the right-hand side a variety of costs of people working in different industries, for example. So there will be certain elements that are factors to take into account in order to ensure that you are paying people the right amount, that you’ve got the right people in your team. And if you’re in a different sector, it’s going to cost you more than if you’re in an alternative sector.
Clearly, you’ve got to think about product, you’ve got to think about the unit cost of your product; what it takes to develop that, the complexity of the product that you want to have, whether or not adding greater complexity or adding more features to that product is going to influence your budget, thinking about it both in terms of unit costs, in terms of development costs, in terms of economies of scale that you may be able to realize might be producing more.
Market factors include the industry that you’re in, the level of competitiveness that exists within that industry, how much are you going to need to budget for, how much are you going to need to spend in order to be competitive versus the other players in that market or in that segment that you’re in.
Sometimes in many cases, from a budget point of view, this comes down to price. What are you going to be able to charge for your product or service in this sector? What our customers willing to pay for? Can you stretch what customers are willing to pay for it?
When determining budgets, you need to consider lifetime value of a customer and the average cost of customer acquisition.
So as we get into an understanding of what is it that we’re trying to get back, what is it that we’re trying to recover from the money that we’re spending in order to be able to achieve our objectives? And the concept of lifetime value of a customer is a really important one that comes into play increasingly. It’s the prediction of the net profit that’s attributed to the entire future relationship with a customer. So if you are able to bring a customer into your business, how much is that customer going to be worth over the entire duration of their future relationship with you? That’s ultimately the money that you’re bringing into the business by acquiring that customer.
What do we mean by customer acquisition? Basically, the price of acquiring a new customer is the total costs of acquiring that customer divided by the number of new customers to be acquired. So effectively, how much money are you spending per customer in order to bring them into your business? How much of that spend is marketing related? So whether that be advertising, whether that be email, whether that be outreach, there are a number of different factors that will be marketing portions of that cost.
There will be other elements of that cost that are not necessarily attributable to marketing. Customer service infrastructure, for example. But if you look at the marketing portion of that cost, and then what you’re trying to understand is basically what kind of return are you getting? How much are you having to spend to bring a customer into the business and how long are they staying for?
If that customer is going to stay with your business for year after year, as in the case of insurance, for example, where a lot of people tend to renew automatically year after year after year. And perhaps the average tenure of a customer might be four, five, six years within a particular company. In those instances, you can understand it might be worth budgeting for a higher cost of acquisition, because the value of that customer is really quite high.
If you think, for example, as an alternative about chocolate, you know, a customer might buy a bar of chocolate one week, another week they might buy a different bar of chocolate. And, therefore, the amount you’re prepared to spend per customer in terms of lifetime value might not be quite so high. You might be thinking about a greater number of customers, but perhaps with a more limited lifetime value. Or you can obviously look at the share of requirements that that customer has. You can look at what proportion of their total needs is going to be fulfilled by your product.
So back to the chocolate bar example, you might say, “Well, this customer is going to consume chocolate for the next 20 years and we know on average that 20% of that chocolate that they buy is going to be ours.” So you can still calculate a lifetime value even if the customer goes away and tends to come back again, provided you spent that initial money on acquisition. So acquisition and lifetime value are really important metric to be able to think about how you can get a return for the budget that you’re beginning to build.Back to Top
John Garnett is Managing Director at Bee Dance Consulting. He specializes in advising and helping businesses with strategy, marketing, and innovation challenges.
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ABOUT THIS DIGITAL MARKETING MODULE
This module dives deep into budgeting and resourcing digital campaigns to set them up for success. It begins by focusing on how to plan a digital marketing budget including the key budgetary factors to consider during planning. It covers how to maximize ROI for a given budget and best practices for recruiting and retaining key digital talent. It also covers topics on setting a budget, addressing campaign objectives and KPIs, timeframes, forecasting, organizational structure and systems, and supporting processes and software. Applying a budget is also covered, including specific topics on traditional media budgets, optimizing digital media budgets, digital media pricing, channel integration and attribution, and budgeting for creative.