For most online marketers, budgeting is an annual rite of passage. Prior campaign results are assessed and upcoming plans approved. Though many consider budgeting onerous and heavily focused on “the numbers,” this process puts marketing efforts into an analytical context senior management can appreciate and assess relative to corporate goals.
Budgeting consists of three major components: forecasting, goal setting, and budget development. It culminates in an approval process. Often, approval involves negotiations that drive further rounds of budget negotiation until agreement is reached.
Forecasting examines the current year’s progress to date and projects results through the end of the year. It allows managers to evaluate progress toward their revenue, expense, and margin goals. (Note: For a detailed approach to forecasting revenues, see “Online Revenue Forecasting Demystified.”)
The easiest way to create a full-year forecast is to develop a run rate, a simplified calculation using recent history to project sales and costs through the end of the period. Calculate as follows:
Run rate = total revenue (or expense) to date/sales periods to date
Projected annual sales = total revenue to date + (revenue run rate x remaining sales periods)
Projected annual expenses = total expenses to date + (expense run rate x remaining periods)
If your firm’s sales or expenses tend to be seasonal, adjust your run rate to take this into consideration. For many online marketers, this translates into December holiday sales. If your business has strong peaks early in the year, calculate the run rate without that month’s sales to determine a more typical month’s quota.
Follow the same calculation for expenses. Separate variable costs, costs associated with delivering incremental product from fixed costs (such as marketing and overhead). Consider the timing differences between marketing spending and when the associated revenues are generated. Remember, offline advertising may drive online revenues.
After forecasting revenues and expenses, calculate your contribution margin, which monitors product costs as a percent of net sales; and operating margin, which shows the contribution to profit before taxes, depreciation, and other factors beyond marketers’ control:
Contribution margin = net revenues – variable costs
Operating margin = net revenues – variable costs – marketing – overhead
After forecasting sales, expenses, and margins, evaluate how they track relative to current budget and actual results for the prior year. Questions to consider as part of this assessment include:
- Did any major market or competitor changes influence results?
- Did any issues change results, such as a delayed campaign or a media partner that couldn’t deliver? Though unfulfilled media buys may help your expense budget, they can hurt your ability to achieve revenue goals due to delayed customer acquisition.
- Have margins changed?
- Have returns percentages changed?
The forecast is the basis for next year’s budget. If you’re tracking behind budget, you may need extra promotions to drive online revenues (for ideas, see “Found Money: Eight ‘Quick Hits’“).
Monitor customer acquisition. Without a quota of new customers, you may reach sales goals in the current year but not have a base from which to build revenues next year. To this end, assess your site to ensure it maximizes customer acquisition and revenue potential. Your Web site is a media entity. It can be used to develop other revenue streams, including advertising, email marketing, list rental, package inserts, and coregistration.
This is another key step in budget development. Goals can be top-down, that is, set in aggregate by senior management, or bottom-up, that is, built on projections based on business-to-date results.
A top-down approach often involves goals that stretch your ability to deliver results, forcing you to look for new ways to do business. Consider how to sell more of the same product to existing customers, sell different products to these customers, acquire more customers through new marketing initiatives, or leverage existing assets to drive revenue (such as coregistration or list rental).
Manage revenue goals within cost constraints. Often, expense budgets require doing more with less, translating to expense budgets that are less than previous periods.
Once you’ve established your forecast and set your goals, you’re ready to build the budget.
In regard to revenues and, to a lesser extent, expenses, a promotional calendar is important, as marketing events drive new customer acquisition and sales. Your company may already have a schedule of existing promotions. If so, this is the time to consider how to enlarge and improve your promotional efforts to drive customers to your site. Think about testing newer formats to aid growth, such as RSS feeds.
As you build your budget, consider adding supporting media such as search to the mix and extending the reach of offline media buys (e.g., TV) by posting ads online. Use these initiatives to increase sales in a trackable manner, such as adding online coupons.
An important component is the timing of your marketing cycle. This involves understanding how and when new customers are acquired, how long before they cycle in as purchasing customers, and how often they buy. Marketing isn’t just about acquiring customers, it’s about retaining them and keeping them buying.
To build your budget, evaluate customer acquisition results by considering the CPA (define) as well as the customer’s lifetime value. A promotion’s efficiency often decreases over time, translating to higher acquisition costs. Consider how to extend existing customers’ purchasing span from you. Incorporate plans to reactivate former customers who may still like your offering.
Coordinate with the revenue-generating side of the business. You must adjust costs associated product production and distribution, marketing promotion and customer acquisition, and on-going business expenses.
Once your budget is complete, it must generally be approved by management. The approval processes often involves delicate negotiations to reach a mutual understanding and ensure results are in line with management expectations. As a result, you’ll likely have to repeat these steps and tweak the numbers until agreement is reached. A strong underlying budget methodology helps persuasively present your case and keeps you from being stuck with an unrealistic budget.
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