Author: james-jones

To play the marketing game prepare a solid marketing budget with which you can win.

Photo courtesy of Christopher Michel.

Crafting a marketing budget can feel like a guessing game. The options to invest your marketing dollars could seem endless, and you could spend weeks debating what will move he needle for your startup. In this article, Steve Lim, Vice President and Head of Marketing at Vantage Data Centers, and I have put together a quick guide that our CEOs and their marketing teams have found useful for budgeting marketing spend. We divide this brief guide in two parts: the three guiding principles for guiding your plan and the process for defining your marketing scope

Guiding Principles: The 3 Cs of your Marketing Budget

We’ve found three simple guiding principles we call the “3 Cs” that can help you navigate your marketing budgeting options.

1. Comprehensive

Your budget must include spend for the key areas:
1) brand awareness
2) content and tool creation
3) demand generation

Specifically, to drive awareness for the brand, you need to budget for public relations, social media, websites and digital presence as well as other brand related programs that reach customers but do not drive direct lead creation or engagement. Then, to develop content and tools, you need to budget for thought leadership content and sales tools. The important thing to keep in mind is that you need an ongoing strategy to tell your story in a compelling way and to portray your company & products in a positive light. Finally, to deliver contacts and leads to sales, you need to budget for things such as digital programs, digital media, trade shows & events, and partner marketing – all of these create a blended program that directly engage customers and drive lead or contact creation for sales teams.

2. Calculated

We recommend that rather than using rules of thumb, you calculate estimated marketing spend based on lead conversion or customer acquisition costs (CAC) payback period.  To do this you need to incorporate specific building blocks, including:

  • Total addressable market (a large market requires a broader marketing outreach)
  • Size of your existing database (if you don’t have a strong target list, then you will need to invest to build it)
  • Size of sales teams and velocity of sales process (you need to calculate the number of leads required to support each sales rep over time and in relation to time of sale)
  • Your market position (newer entrants will need to assume the CAC will be higher, whereas known companies are able to spend less)

3. Committed

For each category of marketing spend, there is a minimum threshold. Either you commit to spending a certain amount or, in the category, forego spending anything. Do not try to find cost savings in specific line items.  The worst possible scenario is to try and execute a plan after your board agrees on that plan but asks for simple percentage cuts across the board.  You have to look at each area of marketing spend and determine what the minimum threshold for spending should be, and either decide to proceed or cut entirely. This is especially true for demand generation programs that drive direct contact acquisition and lead creation. For example, activities like media spend (digital ads, SEM, etc.) require a certain level of investment with some consistency over time to tune, adjust and manage before you see real results. If you cannot commit to spending consistently for a minimum of 6-12 months, you are best to forego this activity completely.

Some areas are more flexible in how you can tune spending up or down, but you need to ensure that you know the thresholds for each as well as the overall mix of spending required across the key areas of marketing. Properly planned and executed marketing is a well thought out mix of spending across the key areas with deliberate thought to how each investment influences the activities overall – essentially the sum is greater than that parts.

Process: Size and Shape of your Marketing Budget

You need to spend time to determine the right size and shape for marketing spend based on your unique circumstances and your market.

Size

The size of your marketing budget should be based on an overall estimate of spend. To determine the range for marketing spend, we recommend using the average cost for an inquiry and lead conversion analysis to estimate the spend per closed/won opportunity (Marketing program portion of CAC). With a range of estimates for leaders and laggards, you can then determine the overall Marketing spend level with confidence. It’s important to note in the process, however, that there are both minimum thresholds that you need to be conscious of and ceilings that are capped based on total addressable markets. Simply put, you have to spend at certain levels across marketing to achieve any results at all – if an average cost per lead is $100, you can decide to invest $100 and get one lead.  On the other end, you should not assume you can put an unlimited budget into marketing and generate infinite leads.  You’ll be limited by the total addressable market and by some basic assumptions about what a reasonable penetration percentage is for your target market.

To size the marketing budget determining the average costs per inquiry, answer the following key questions:

  • What is the quota assignment?
  • What is the average sales price (ASP)?
  • How many new deals per year?
  • How many Quota Carrying Sales reps today and planned?
  • Who is the buyer? what level? executive? manager? is this a software purchase?  What part of a typical org would make the purchase?
  • What is their target market geography? Are they going after just US business or global?
  • What is the length of the sales cycle (sale velocity)?

Shape

The shape of your marketing budget is determined based on the relative importance and spend between brand awareness, content & tool creation, and demand generation. For an early stage company to build infrastructure and capabilities, there is a minimum amount of spend needed in all areas. In later stages, companies can shift emphasis and spend depending on whether they need to build awareness, capabilities or sales leads. The shape is also determined based on the approach to planning and executing your marketing programs. This approach can be either agency or internal-resources led with the appropriate management resource for each approach and is a basic build vs. buy decision. To achieve high levels of quality, many startups should use an agency-model until they can hire enough people to assume relevant functions – after all, the trend in marketing – and in finance also BTW – is rent versus own.

Co-author Steve Lim is Head of Marketing at Vantage Data Centers. He has deep experience in marketing strategy, field marketing, sales enablement, program development & delivery, content marketing, and operations.

Timing is everything when it comes to finance talent.

Nowadays, when startups raise money from VCs, especially in the early stages, line items in their financial projections do matter. For instance, in an era when all marketing tools give you freemiums or super low entry price points, and social media rules over mass media, your marketing budget can’t be what it was for startups a few years ago. Some VCs will go as far as saying you don’t need money to do good marketing until you grow the business on a dime. The same is true for finance. Why would you need a CFO when you can rent one? After financing is complete, what would a CFO do all day anyway?

Last week I was invited to do a talk at the inaugural Veterans Conference in San Francisco. When thinking how to make my talk useful and memorable to veteran founders and CEOs of early stage companies, I came up with the 2×2 matrix below (I’m an HBS graduate – we’re required to do a 2×2 matrix at least once a week for life!). Anyways, the chart provides a framework to help CEOs and founders distinguish between various finance and accounting roles, and to understand when and how to engage the right resource along their journey.

Framework for Finance Talent

The first thing to note are the axes. The progression to a full time CFO is natural as the level of help you need depends on the age of your startup. In an era when you can rent and not buy everything, finance talent is no exception. You need to strike a balance between looking at the past to ensure everything is in order (bookkeeping) and looking at the future to ensure you grow in the right direction (strategic finance).

The good news is that you can have your cake and eat it too!

Timing is everything

Here’s how it can play out. At the beginning, pre-seed and pre-revenue, you only need a bookkeeper. I recommend you to hire yourself as this guy – it will help you get a good handle on the levers that drive your business, and it will not take more than a couple of hours of your time every week. Then you start growing, the dogs eat the dog food so you raise a seed. At this point, your attention needs to focus on revenue and you need a professional bookkeeper. It is at this point that you also need to rent a CFO who can help you, giving you just a few hours per week, to lay the foundations of your business model so you can think about the future from a finance perspective (remember, bookkeepers are trained to look at the past).

Then comes the point when you will need more CFO cover. From Series A through D you will need to cover all bases. You need your bookkeeper. You also need more time from your on-demand CFO, who can help you with historical and pro forma financial statements, unit economics, raising capital and business modeling. Eventually you need to complete this team with a controller to build and improve processes and systems and ensure GAAP accounting), and maybe FP&A Analysts to support detailed and compressive operational metrics and dashboards and with corporate performance management tools.

Ideally, there comes a point in this journey, usually close to an IPO or an exit, when you stop renting your CFO and buy one. You should feel good – you’ve graduated to the next level and you need not only the full time of a CFO, but her undivided attention and a deep knowledge of what makes your company tick.

There’s a time for everything. Like in all graduations, you’ll have mixed feelings. You’re not a startup anymore.

Photo courtesy of Navy veteran, Silicon Valley entrepreneur and photographer Christopher Michel.