Simple Formulas for Calculating Marketing Budgets

The Growth Report - #18

Hello Friend!

I’m back with another edition of The Growth Report (yes that’s the new name of this newsletter!). As mentioned last week, I am transitioning the newsletter over to the newsletter publishing platform Substack.

What’s new:

• If you scroll all the way down you’ll see that every newsletter edition now has its own comment-section. So if you have anything to say or contribute about a covered topic, please leave your feedback there. Try it right here:

• You can now show some ♥️ at the top of every article, which in turn lets other people on the platform discover the publication as well. So if you like what you read, your vote would be highly appreciated 🙏

• I uploaded all previous editions here as well: growthreport.substack.com, so you can browse through all the topics I’ve covered and you might have missed.

There’s so much more to come in the coming months! Thank you for your continued support.

Cheers,
Sandro

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Today's topics include

📈 Marketing:

• Simple Formulas for Calculating Marketing Budgets

• Podcast: Seth Godin's Secrets to understanding your audience

📣 Market Trend:
The End of Efficiency

🧠 Personal Growth:
Cultivating a Beginners Mind

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📈 Brand Marketing

Simple Formulas for Calculating Marketing Budgets

In a marketing community that I am a part of there was a lively debate on how to calculate marketing budgets. Having grappled with this myself for years, I found the following two simple approaches shared by the CMOs of two large startups very helpful.

The Percentage-Based Approach

Sirius Decisions benchmark data reported marketing budgets between 9-17% of revenue at startup ARR ranges (0-$50m ARR) and 7-12% at scale-up ($50m-$250m). Matt Sweezy from Salesforce did a good presentation on the five traits of leading organizations as well, where he identified over-investments in marketing as one of the major traits with a budget of 13-30% on (projected) gross revenue. It's important to mention that its different for every company depending on the appetite of the CEO/CFO and their understanding of marketing as a growth driver.

In my experience where you will land depends on a few factors:

1. Growth objectives. Want more growth? Invest more in marketing

2. Margins. Make more money? Invest more in marketing

3. Tolerance for risk. Companies are all over the map here. Well-funded West coast companies in the US still often operate at a "growth at all costs" mentality and are willing to invest more in marketing. But for most of us, CFOs are providing guidance to "grow responsibly" meaning you are probably going to end up on the lower side of those ranges.

The Top-Down Approach

1. Calculate the budget based on new revenue you're planning for the year.

2. So let's say you want to add $10M in NEW revenue

3. Divide $10M in NEW revenue by the ACV (average contract value aka what customers will pay you), that would give you the number of customers you need to acquire. Let's assume its $5,000, that would make 2000 new customers.

4. Multiply 2,000 customers by your CAC (cost to acquire a customer) -- so let's say it costs $1500 to get a customer. That is $3M.

5. That is the full budget for sales AND marketing. Marketing should be half of that -- 50% marketing, 50% sales. So the full marketing budget for the year would come to $1.5M.

I personally like the latter formula better, because it is thoughtful and forces the CFO to report on Cost per Lead and Customer Acquisition Cost.

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Podcast: Seth Godin's Secrets to understanding your audience

This episode from one of my favorite Marketing Podcasts Everyone Hates Marketers is really worth listening to.

Link to the Episode on Spotify

Seth Godin breaks down his advice on the following topics:

• Acting as a customer to understand how and why people buy

• Don’t use your own worldview in marketing as it will be very different from someone else’s worldview

• Why you have to be specific about the worldview of the people you are seeking to reach and the change you seek to offer to get results

• Why you should test changes in small areas before making big company-wide changes

• Applying the same strategy of watching people in stores to how people behave when they shop online

• What you can do to truly understand your audience and build empathy

• Try to imagine what it’s like to be the person you seek to serve

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📣 Market Trend

The End of Efficiency

Ever since Max Weber and Frederick Taylor, efficiency has been the ultimate business goal. Production, distribution, synthesizing workflows, and managing resources and employee output have all been held to the same standard of maximizing labor efficiency and minimizing slack.

We find modern examples of that all around us:

• Open-office plans

• Restaurants optimizing for "table turnaround"

• Retirement homes feel like industrialized care for the elderly

• Airlines offering the growing a-la-carte menu of auxiliary services, like checked bags, legroom, meals, and pillows.

But marketer and sociologist Ana Andjelic suggests that "the business model of restaurants, together with retail, fitness, travel, hospitality, beauty salons, and physical products etc. is going through the Great Inefficiency reckoning", because if you are currently operating at only 50% capacity in a efficiency-driven business you are in real trouble.

So she suggests there are five de-efficiency shifts that are happening in the world right now: De-Massification, De-Specialization, Decentralization, Improvisation and Community-fication.

Following, I summarize the different shifts Ana describes in her long-form op-ed:

De-Massification

For the past century mass production and consumer society were king. Car manufacturing, consumer electronics, and IKEA furniture present approachable aesthetic of mass production. However the revival of handmade and locally produced products is well on its way and has been growing at an every increasing rate over the past years. Consumers are starting to realize that less, but higher quality products that last longer have their appeal. On top of that, more and more people waking up to the fact that the logistics networks necessary to uphold the current economy are taking a heavy toll on the environment.

De-Specialization

When we mass-produce things, functional specialisation and division of tasks make perfect sense. But as the world becomes more complex and technological advances disrupt industries at an ever increasing rate, specialisation is ill-equipped to solve fuzzy and multi-disciplinary problems. Answering how to use physical stores to drive revenue across channels or how to change cost models to support the new role of stores require a holistic perspective and a versatile skillset. As a knowledge worker today you are the most valuable not as a specialist, but someone who has a versatile skillset to grow the business, move the wider culture, and help others do their job better.

Decentralization

The Financial Times did a piece on the end of the office and note that “the notion of putting 7,000 people in a building may be a thing of the past”. Ana notes that in her conversations with founders and corporate workers she found that "the current way of working - in a more decentralized manner - made teams be more aligned and collaborative, and made their decisions faster, in a lateral, grassroots manner". Similar in retail she reports that "smaller, more decentralized stores are more viable than the massive ones. They can more easily stock and sell merchandise based on the local demand, offer personalized service, and more focused assortments".

Improvisation

The world moves so fast and trends and tastes change so quickly that adaptability and improvisation skills become more important with every year. Organizations who do not run a lean and agile ship, have a very hard time today to stay current with their products, services, communication and shifts in technology and consumer tastes. The ones who have the data to see and interpret the trends before they happen have a distinct advantage.

Community-fication

I talk about the increasing importance of communities online and offline in every other newsletter. And with good reason. In this case, in mass production, efficiency requires short-term, impersonal interactions. But in craft production, the act of making involves an entire community of tradesmen, artisans, farmers, workers. Ana points out: "A handcrafted object is usually the beginning of a long-term connection between people who source materials, work on objects, and sell them. Consumers are also more willing to spend a premium on handcrafted items. This is due both to the items’ quality and to items being enriched by everyone who touched them: the community that surrounds each handcrafted item."

One important caveat for all of these trends:

The success of companies embracing Ana's Idea of "The Great Inefficiency" in their behaviors (and P&Ls) ultimately depends on the consumer, and how they find desirable to work, live, and entertain themselves.

All of the above shifts feel "more human" and while the focus on efficiency and productivity has certainly earned its place as the main driver of our economy and the quality-of-life improvements we made as a society over the past couple of years, they have certainly also led to a lot of destruction and detachment towards our fellow humans.

I'd love to see us all embrace some of those trends and bring our world back into balance.

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🧠 Personal Growth

Cultivating a Beginners Mind

In a recent article by Aeon editor Christian Jarrett, he talks about the dangers of viewing ourselves as experts in a certain topic and quotes the Zen monk Shunryu Suzuki:

‘In the beginner’s mind there are many possibilities, but in the expert’s there are few.’

He makes the argument that people who are more intellectually humble actually know more, presumably because they are more receptive to new information. And this makes perfect sense. When we think we already know everything, we close our minds to different perspectives and morph into the metaphorical ivory-tower expert, preaching our (one-sided) wisdom from the rooftops to everyone who will listen. So he proposes to cultivate the art of shoshin, the Japanese term for 'beginners' mind', to help us counter the disadvantages of intellectual dogmatic behaviour.

Christian furthermore describes a few strategies to foster our intellectual humility:

• Be aware that we all have an innate confirmation bias. We are naturally inclined to seek out information that supports our current views and beliefs. This perpetuates closed-mindedness and makes us ever surer of our own knowledge.

• Explain a theory or idea to yourself or someone else. Overconfidence in your own knowledge and expertise fuels closed-mindedness. By attempting to explain an idea or argument to someone else, you will get a more realistic sense of what you do and don’t know.

• Argue with yourself. It’s an essential part of human psychology that we are inclined to seek out knowledge and information that is consistent with our current views and beliefs. Try to be more aware of this ‘confirmation bias’, and deliberately counteract it by debating with yourself – look for evidence or arguments that challenge your current perspective.

• Recognise that intelligence is not fixed but accrues through the pursuit of knowledge. If you believe in the malleability of intellect, this is known as having a ‘growth mindset’ (by contrast, if you see people as essentially either smart or ignorant by nature, then you have a ‘fixed mindset’). By periodically reminding yourself that expertise is something that accrues through study and effort, you are more likely to develop a growth mindset, and in turn this will help you to be more open-minded.

And make no mistake this stuff is hard. Because we don’t like discovering (or letting others know) we’re wrong or ignorant because it dents our self-esteem and ego.

But in the words of Christian it is well worth it:

By practising being flexible rather than dogmatic, more humble and less brazen, you will be sensitive to other people’s perspectives and needs, making you a better sister, brother, father, mother, partner and friend. With eyes and mind wide open, it’s so much easier to enjoy the wonders of the world, to grow, to learn and to listen.

And let’s be honest, we don’t like the self-proclaimed experts that are scattered all over the internet anyways.

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That's it for this week.

Enjoy your weekend 🏡

See you next week,

Sandro