Setting a Marketing Budget That Isn't a Guess

Ask ten businesses how they set their marketing budget and most will describe a feeling. A number that seemed affordable. Whatever last year was, plus a bit. What the agency’s middle package cost.

None of those tell you whether the money is working. Here is a method that does, built from figures you already have, and it takes about an hour.

Why the percentage rules are a sanity check, not a method

You will have seen advice to spend some fixed share of revenue on marketing. Different sources suggest different shares, and they are all averages drawn from wildly different businesses.

The problem is not that the numbers are wrong. It is that the logic runs backwards. A percentage of revenue tells you what you might be able to afford. It says nothing about what a customer is worth to you, what you have to pay to get one, or how many you can actually service. Two businesses with identical revenue can have completely different correct budgets, because one sells a service with thin margins and no repeat business and the other sells a retainer that runs for years.

Use a percentage as a rough check at the end — “does this number look sane against our turnover?” — and never as the starting point.

Step one: what a customer is worth

Not the sale price. The gross profit, and over the whole relationship.

Take your average sale value, subtract the direct cost of delivering it, and you have gross profit per sale. Then ask how many times an average customer buys, and over what period. A one-off job worth two hundred pounds in gross profit is a different proposition from a service a customer keeps for three years.

Be conservative. If you are not certain about repeat rates, use the first twelve months only. A budget built on optimistic lifetime value is how businesses end up spending money they do not have against revenue that has not arrived.

Write down one number: gross profit from an average new customer in year one.

Step two: how many enquiries make a customer

This is your close rate, and most owners overestimate it.

Count enquiries — calls, forms, messages, walk-ins — over a period you have decent records for, then count how many became paying customers. If one in four enquiries converts, your close rate is 25 per cent. If it is one in ten, it is ten per cent.

Two refinements matter.

Separate qualified from unqualified. If half your enquiries are people asking about something you do not offer, your real close rate on relevant enquiries is much higher, and your marketing problem is targeting rather than conversion.

Separate by channel if you can. Enquiries from a paid search ad, a referral and a directory listing rarely close at the same rate. Averaging them hides which channel is actually working.

If you cannot answer this question at all, stop here and fix that first. Everything downstream depends on it, and it is what conversion tracking in web analytics is for. Without it, you are not budgeting, you are gambling with better spreadsheets.

Step three: what you can afford to pay for an enquiry

Now the arithmetic does the work.

Say gross profit from a new customer is £400 in year one, and one in five enquiries converts. Five enquiries produce one customer and £400 of gross profit. So five enquiries are worth £400, and one enquiry is worth £80.

That £80 is your break-even cost per enquiry. Paying that much would leave you exactly no better off, so you need a target below it. How far below depends on what you want the money to do:

• Roughly a third of break-even if you want marketing to fund itself and contribute profit immediately.
• Around half if you can wait, have repeat business, and want to grow faster.
• Close to break-even, briefly and deliberately, if you are entering a market and treating the first customers as an investment.

In this example, a target of £25 to £40 per enquiry is a sensible working figure. That number is now the thing you manage against, and it is far more useful than a monthly budget, because it tells you when to spend more and when to stop.

Step four: how many customers do you actually want

The easiest way to waste a marketing budget is to generate demand you cannot serve.

Work out your capacity honestly. How many more jobs, clients or bookings can you take next quarter without service quality dropping or you personally working weekends? What would you need to hire, and at what point?

Then set the target: extra customers wanted per month, multiplied by enquiries needed per customer, multiplied by your target cost per enquiry. That is your monthly working budget.

Continuing the example: ten extra customers a month, at five enquiries each, is fifty enquiries. At £30 each, that is £1,500 a month. Now you have a number that came from somewhere.

Sense-check it against margin. If ten extra customers produce £4,000 of gross profit and cost £1,500 to acquire, the maths works. If they produce £1,600, it does not, and no amount of clever advertising will fix a proposition that thin.

The floor: the minimum that can teach you anything

There is a level below which paid advertising cannot produce reliable information, and spending under it is worse than not spending.

Rough test: you need enough clicks to see conversions, and enough conversions to tell signal from noise. If your cost per click is £3 and you budget £150 a month, you buy about fifty clicks. At a typical enquiry rate that might be two or three enquiries — far too few to judge a keyword, an ad or a landing page.

If your realistic budget sits below that floor, do not run a thin paid campaign anyway. Put the money somewhere it compounds instead: your Google Business Profile, review generation, fixing the pages that already get traffic, or the slower build of SEO. Then start paid search when you can fund a real test. Setting expectations honestly about that floor is something we would rather do before taking a budget than after.

Foundations and growth are different money

Two categories, and conflating them causes arguments.

Foundations are things that must exist before anything else works: a site that loads and converts, working tracking, a complete business profile, basic photography, the core service pages. These are largely one-off or infrequent, and their return is indirect — they make every subsequent pound work harder. Judging them by immediate enquiry volume is a category error.

Growth spend is the recurring money that buys attention: advertising, content production, ongoing optimisation. This is what the cost-per-enquiry maths governs.

If you are starting from a weak site, expect the first few months to be foundation-heavy. That is not a bad deal, but it should be stated plainly rather than discovered later. Rebuilding or repairing the website usually has to happen before spending on traffic makes sense.

Review it against what happened

A budget set once a year and never examined is only marginally better than a guess.

Every quarter, put three numbers side by side: what you spent, how many enquiries you got, and how many became customers. Divide to get actual cost per enquiry and actual cost per customer, then compare with the targets you set. If actual cost per customer is below your target, you have a case for spending more, not for congratulating yourself. If it is above, the problem is either the targeting, the landing page or the offer — and it is worth working out which before adding budget.

Watch for the seasonal distortion too. A quarter that spans your busy period will flatter the numbers, and one that spans the quiet months will look alarming for reasons that have nothing to do with the marketing.

The honest caveats

Attribution is imperfect. Some customers who find you through search will say they came by recommendation, and both will be true.

Early figures are noisy. Twenty enquiries is not a sample you should restructure a business on. Give any change a full quarter before drawing conclusions, unless something is obviously broken.

And the method has limits. It works well for businesses with countable enquiries and a reasonably short sales cycle. If you sell something bought once a decade, or your growth genuinely comes from reputation over years, the arithmetic will underrate the slow work. Use it as a floor for decisions, not as the whole picture.

What it does reliably is replace “what can we afford?” with “what is a customer worth, and what are we willing to pay for one?” That is a much better question, and it is answerable.

If you want a second pair of eyes on the numbers before you commit, get in touch.