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Ask GH: How much money should a 2-3 year old B2B startup invest in paid marketing?
Ideally I'd like to get answers from experienced entrepreneurs or marketing agencies that work with startups. Thanks!
Generally I like to have a small budget where I can test channels for a positive ROI. If a channel delivers a positive ROI I scale it as much as I can. Of course it's important to have enough cash reserves to actually be able to scale spending. If you don't have much cash, you'll need a fast payback on marketing dollars invested. But if you have lots of cash, you may be able to wait a year or more to recover the investment. Personally I don't scale investments in marketing programs that don't offer a tracked return on investment. So, under these parameters, I like to spend as much as possible on marketing.
But don't forget to budget resources to test "free" product-driven growth drivers as well.
I agree Sean. I've been in startups many years now so I know all about testing first. Now it's the first time that I'm actually going to have a marketing budget, and I'm trying to decide how much of it would be allocated to people and how much for paid marketing.
I already allocated the budget for the "free" including software needed, graphic design, etc. Would love to get a real number or range of numbers just to see if I'm in the right direction.
At LogMeIn, I spent about $10,000/month on advertising for the first 3 months, and then figured out how to profitably move it to $1M/month. We also treated our customer support costs as a marketing expense, since the free version on LogMeIn accounted for the majority of our customer support team's time.
At Dropbox, which grew significantly faster in the first year than LogMeIn, we spent essentially nothing on external advertising. Of course giving away free space as part of the freemium model was an expense.
So the range in just these two companies was almost nothing on traditional advertising, to over $1m per month. Not sure how useful that will be for your situation.
Another way to look at it is by your target revenue. What is the team and advertising expenses likely required to reach your target. This will be largely based on models that will likely have a lot of inaccuracies, so as before I recommend that you try to build in flexibility to whatever budget you create. If spending the full budget requires wasting money on bad performing campaigns, I'd try to cut that budget. If you identify scalable positive ROI campaigns that would take you beyond the current budget, I'd recommend that you have a way of presenting that data to the CEO and finance team to get the budget increased.
I love that you guys treated customer support costs as a marketing expense. That's probably the most eloquent way to force quality > quantity decisions I've seen.
Thanks Sean this is really helpful!
"I’d recommend that you have a way of presenting that data to the CEO and finance team to get the budget increased." +10.
Already a few great answers but I'd like to add some notes from the digital marketing agency point of view -
First off, tracking is everything. Don't settle for any channel that cannot be tracked and if you can track LTV- even better.
Second, run tests with low budgets and when the iron is hot strike hard. Careful though, often a campaign will look profitable at small scale but when pushed media costs rise.
Third- there's always something to be learned even from the most unsuccessful of campaigns. Most digital channels offer the ability to dissect the data where clues to a successful campaign can be found. In Facebook ads, you can cohort your results into breakouts of targets, demo, geo, device and be able to find profitable converters amongst the data.
Finally, if you are using an agency, make sure that they are bettering their efforts by constantly looking for ways to optimize acquisition costs and bring new tests to the table. Often after a first taste of success an agency can slack off or milk the ongoing campaign. Before you know it you could be at square one.
good luck to you.
To answer that question, we need to know more about the company and it's traction.
Is the company growing? profitable? vc-funded/bootstraped? segment?
Thanks James, I'm looking for an "average" number to start from.
The company is funded and growing, acquired first few paying customers (large companies mostly) and looking to add 60-70 paying customers within 6 months.
It is a content marketing tool that companies use for lead generation, on-boarding users, how to guides and more.
Hope that helps, will be happy to answer any additional questions!
This is too hard of a question to answer, because there are lots of unknown variables. Paid isn't a one-size-fits-all thing. The big things you need to consider are budget, ROI, and how long it takes you to recoup your spending.
For example, if you're running a campaign where your CPA is $100 and you can recoup that $100 (or more) at time of acquisition, you can probably scale that campaign without concern for budget because it's self funding. But if it takes you two years to recoup that $100, you need to be much more careful about how you slice your budget.
If SaaS delivery, and the customer set is SMB (not enterprise), and the sales model is online direct (with possibly some inside team augmentation) then the 'classic' Salesforce.com total S/M spend model of a minimum of 50-60% of projected year 3 revenue is the usual course for funded startups. Marketo is slightly above this trajectory, for example. Hubspot (per their S1) is also on the Salesforce trajectory. The breakouts for people, programs, events, ad spend can sometimes be found in the 'Management Discussion' section of publicly traded SaaS vendors. The VC Tomasz Tunguz has a series on this topic now with real data from multiple SaaS startups.
If it's a XaaS platform play (database-as-a-service, mobile-backend-as-a-service, analytics-as-a-service, security as a service, etc.) to a set of cloud or SaaS partners that plug it into their solution, and developer self-service is in the mix, you can drive marketing/sales spend down much lower than an end-customer focused SaaS model with the right approach.
ROI of paid in itself is a good angle, but I also like to make sure paid is not an excuse for the team to not do a good job with organic, referral etc.
It's like an unknown author hiring an agent to promote a book. That's a good investment as long as you make sure to write the good book first. So as a rule i like to limit paid to absolute minimum till organic is healthy, and after that spend as much on paid as the ROI calculations below suggest, typically putting the new revenue that paid efforts generate back into doing more paid.
Thanks Stjn! So far we have only been doing inbound marketing (with great results) I plan to hire a campaign manager to deal with paid marketing when all the other team will keep doing inbound. and definitely the idea is to invest the revenue back into the budget but I still need a number to start from in the first few month.
This is a huge unknown. I would say it would be worth it before thinking about your spend to put together a mix model - no one marketing method works alone.
It depends how quick your ROI is. If it is quick then the budget should have no limit really; if you spend $1 and get $2 with no cash flow/capacity problem, why would you want to limit the budget?
I've heard other companies do this in the past. They'd "play the float". If you can figure out what your LTV is per user, then extend out the length of time you have to pay the bill to equal the time it takes to get to break even for the user, you can essentially uncap the spend.
I agree with this 100% (although for recoup cycles longer than a year, I think LTV should be discounted). Your marketing time / attention is better spent on paid marketing than on more incremental efforts if you can clearly quantify positive ROI.
+1 Sean and Moody's answer.
I run a B2B SaaS company that's just over 3 years old. I would do the following:
- I would start at $4000/mo or $1000/week. Anything lesser won't give you enough data points
- Do Adwords before you do any other form of paid advertising
- Target more long tail keywords than the most popular ones to make sure you get most out your $4k
- Your company should spent 2-3x the same budget towards organic channels. They offer more long term results
- Must do on-page A/B testing every month for visitors coming from this channel
- Increase budgets on quarterly basis but tweak keywords/campaigns every week
- Keywords with good ROI should be immediate targets for organic team for optimization
Great answer Shalin, thanks!
To get a sense of the necessary budget, think about your sales process. Are you trying to get customers to signup by themselves? Are you trying to feed leads to the sales team?
Tou could try is to calculate your CAC by channels and try to reproduce same results on paid marketing.
You also have to understand that you generally need to optimize your campaigns before you can have good results.
I'd suggest you to start with a budget between $1k and $5k. See the result you can get with that budget. It also depends on the money you can invest but this budget can get you started.
One thing you could also consider is to hire a consultant to design the strategy and help you bootstrap your campaigns. They'll help you to avoid the main pitfalls associated with paid marketing.
1/3rd of CLTV.
Hey, do you mean to say 1/3 of CLTV as a target CPA? Or 1/3 forecasted CLTV as a macro budget?
The first one, but it really depends on the amount of CLTV and whether people can become a customer without an actual sales person present.
I target 3X my acquisition costs (paid + other COGS) in new ACV (annual contract value). So if I pay $1 today to acquire a customer I want a 4 month payback on that dollar. The actual numbers themselves are less important than the thought process and being able to measure this. If you can't, you're not going to be able to keep testing and optimizing in search of the right answer. Your ability to scale return on dollars spent should ideally dictate dollars spent.
It might also be helpful to spend some time studying S-1 filings from companies like New Relic, Hubspot, Marketo, etc. Try to understand how much they spend to acquire customers and how that breaks down by channel.
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