Cost and budget · 10 min read
Size your marketing budget from unit economics, not a percentage rule
Percentage-of-revenue rules tell you what you can afford to lose. Unit economics tell you what you can afford to spend. This is the working — customer value, margin, close rate, target volume and payback period — with placeholder numbers you replace with your own.
Written by Zubair Afzal, FounderUpdated
A percentage-of-revenue budget tells you what you can afford to lose. Unit economics tell you what you can afford to spend. Those are different questions, and only one of them is about growth.
Percentage rules survive because they are easy to agree in a meeting. They are backwards-looking, they ignore margin entirely, and they treat a business with a two-week sales cycle the same as one with a two-year cycle.
The alternative is not complicated. It takes six steps and about an hour, and it produces a number you can defend line by line to whoever is going to challenge it.
The method
Six steps from customer value to a defensible budget
Every number in the illustration below is invented for the purpose of showing the arithmetic. Replace all of them with your own before drawing any conclusion.
Start with what a customer is worth
Take your average first-order revenue and, separately, your realistic lifetime revenue. Illustration with placeholder numbers: say a customer spends £4,000 on their first job and £9,000 over three years. Those are made-up inputs. Use yours.
You get: First-order value and lifetime value, stated separately
Convert revenue into contribution
Apply your gross margin, because you cannot spend revenue you never keep. Continuing the illustration: at a 40 per cent gross margin, £4,000 of first-order revenue contributes £1,600. Again, placeholder figures — your margin is the number that matters.
You get: Contribution per customer
Decide your maximum allowable acquisition cost
Choose what share of contribution you are willing to spend to win a customer. A business funding growth from cash flow might allow a third; one with investment behind it might allow all of it. In the illustration, a third of £1,600 gives an allowable acquisition cost of roughly £530.
You get: A ceiling on cost per customer
Work back to a cost per enquiry
Divide allowable acquisition cost by your close rate. Placeholder: if you close one enquiry in five, £530 per customer means about £106 per enquiry is the most you can pay. This is the number that tells you whether a channel is viable before you test it.
You get: A maximum cost per enquiry
Multiply by the customers you actually need
Take your growth target, subtract what repeat and referral business will deliver, and you have the number of customers marketing has to produce. Placeholder: needing 60 new customers at £530 allowable gives roughly £31,800 a year. That is your budget ceiling, not a recommendation.
You get: A budget figure with the working attached
Test it against cash, capacity and demand
Three checks. Can you fund the gap until customers pay back? Can you actually serve sixty more customers? Does enough demand exist in your market for sixty to be reachable? A budget that fails any one of these is a plan to waste money efficiently.
You get: A funded, serviceable, realistic number
What you need
The seven figures the method depends on
You do not need these to be precise. You need them to be yours. An approximate number from your own last fifty customers beats an exact-looking benchmark from someone else's business every time.
- Average first-order revenue per customer, from your own invoices rather than an impression.
- Realistic lifetime revenue, based on observed repeat behaviour rather than a hopeful assumption.
- Gross margin, so the budget is built on money you keep rather than money you handle.
- Enquiry-to-customer close rate, counted from your last fifty enquiries.
- How many new customers you need, after subtracting repeat and referral business.
- Payback period — how many months between spending and being made whole on a customer.
- Follow-up capacity — how many enquiries a week your team can genuinely respond to properly.
Three ways businesses set budgets, and what each gets wrong
Two of these are common. One of them survives contact with a finance director.
| Dimension | How it works | What it ignores | When it is defensible |
|---|---|---|---|
| Percentage of revenue | Take last year's revenue and allocate a share of it. | Margin, close rate, sales cycle, repeat business, and whether the demand exists at all. | As a sanity check on a number you derived properly, never as the derivation itself. |
| Match the competition | Estimate what rivals spend and spend similarly. | That their margins, customer values, close rates and funding position are almost certainly different from yours. | Rarely. Occasionally useful as evidence of what a market costs to compete in, not as a target. |
| Unit economics | Derive allowable acquisition cost from contribution, then multiply by customers needed. | Nothing structural, but it depends on your figures being honest and on demand actually existing. | Almost always. It is the only one of the three that survives a challenge line by line. |
The real constraint
Payback period usually decides this, not the arithmetic
The method above produces a ceiling. What determines whether you can actually spend to that ceiling is how long it takes a customer to pay you back and how much cash you can put between now and then.
If a customer takes nine months to repay what it cost to acquire them, and you can only fund three months of that gap, your budget is set by your bank balance rather than by your economics. This is the point at which sensible companies choose a channel that returns faster, even knowing it costs more per customer, because a cheaper customer you cannot afford to wait for is not available to you.
Payback period is also the honest reason for a lot of channel decisions that get justified on other grounds. A business that opts for paid search over organic search is often not making a claim about effectiveness. It is making a statement about cash.
Two related traps. Spending against lifetime value with first-order cash is the fastest way to run a growing business out of money. And treating the website and the follow-up process as outside the marketing budget means paying to send enquiries into something that loses them.
What actually goes wrong
Three ways a correctly sized budget still fails
- Enquiries arrive and nobody answers them.
- The most expensive failure in marketing is a lead that was paid for and never called back. Capacity to follow up is a marketing variable, and past the point where it is exceeded, additional budget produces nothing but a longer list of ignored enquiries.
- The spend is right and the conversion path is broken.
- A budget aimed at a website that does not convert is a budget spent on demonstrating the website does not convert. If your enquiry rate is poor, fixing that is a cheaper source of growth than buying more visitors, and it improves every channel at once.
- The market is smaller than the target.
- Sometimes the arithmetic says you need sixty new customers and the realistic demand within reach is thirty. That is not a budgeting failure, it is a strategy finding — and it points at new markets, new services or a higher average order value rather than more spend.
Questions
Budget questions worth answering before you commit
What percentage of revenue should I spend on marketing?
There is no defensible general answer, and any figure quoted as an industry standard is worth ignoring. A percentage rule ignores your gross margin, your sales cycle, your close rate and how much of your revenue is repeat business — which are the four things that actually determine what you can afford.
Derive the number from your unit economics instead. The method on this page takes an hour and produces a figure you can defend line by line.
Should I budget against first-order value or lifetime value?
Against whichever your cash position can survive. Spending against lifetime value is legitimate and often correct, but it means paying today for revenue that arrives over years, which requires funding the gap.
A useful discipline: calculate both, spend against first-order value while you are learning what actually converts, then move toward lifetime value once you have real retention data rather than an assumption.
What limits how much I should spend?
Three things, and usually not the one people expect. First, payback period against available cash. Second, capacity to serve — how many new customers you can actually take on. Third, the amount of real demand that exists in your market.
Money is rarely the binding constraint. Follow-up capacity usually is, and spending past it turns marketing budget into unanswered enquiries.
Does the marketing budget include the website?
It should. The website is where most of the enquiries are won or lost, so treating it as a separate capital project means you can end up funding traffic to a page that does not convert.
The same applies to follow-up: response time, CRM, and whoever handles enquiries. Budget the whole path from search to signed customer, not just the media at the front of it.
How do I set a budget when I do not know my close rate?
Estimate it from your last fifty enquiries, however roughly. Count them, count how many became customers, and use that. An approximate figure derived from your own data is far more useful than a benchmark from someone else's business.
Then instrument the process so that in three months you have a real number. The first budget you set with estimates is a hypothesis; the second one should be evidence.
What if the numbers say the budget is unaffordable?
That is a genuinely useful result, and it usually points at the economics rather than the marketing. If no realistic acquisition cost works, the problem is margin, price, close rate or retention, and no amount of spend fixes it.
It is far cheaper to discover this on a spreadsheet than after a year of campaigns. Improving close rate or average order value often makes a viable budget possible faster than hunting for a cheaper channel.
Want someone to check your working?
If you have run the numbers and want a second pair of eyes on the assumptions — particularly close rate and payback — we are happy to look. Bring your figures rather than a brief.
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