Your Complete Guide to Annual Planning (Part 3): Marketing Budget
Our five part series on Annual Budgeting for Tech Startups
Welcome back to part 3 of our 5 parts series on Annual Planning.
If you’re late to the planning party, here’s a snapshot of our syllabus:
Part I: The Kickoff
Who’s involved in annual planning?
Bottoms up vs tops Down forecasting
Guiding questions and guardrails
Part II: Building sales capacity
Modeling out rep ramp time
Pod ratios: Business Development Reps, System Engineers, and Sales Managers
Quota deployment and over assignment (shhhh!)
Part III: Designing a marketing budget (This post!)
Modeling Pipeline Coverage and understanding the marketing funnel
Working with your CMO to develop a “GL pick list”
Programs vs People cost split
Part IV: Costing out the P&L
Modeling headcount as an input, and a driver
Forecasting non-people costs
Developing a mutually exclusive list of expense types
Part V: Bringing it all together (the week after next week)
Modeling P&L by cost type vs P&L by department
Checking your outputs: CAC Payback, ARR per head, cash runway
Five year plan tie in
This guide comes from thousands of hours on the job, designing annual plans for multi billion dollar tech companies. And it’s strongly influenced by the hundreds of hours spent with my entrepreneur friends who are building their very first budgets.
Today we’ll explore the nuances of building a marketing budget to ensure your sales team has enough pipeline to hit their goals.
Unlike our sales capacity model, which is built bottoms up, marketing targets are built in reverse (and then sanity checked tops down).
Let’s secure the bag pipeline.
Generating Pipeline Coverage
Pipeline Coverage Multiple: Working backwards based on assumed conversion rates, this is the multiple of sales quota you want your marketing team to generate in qualified opportunities.
For most SaaS companies, it’s assumed to be anywhere from 200% to 350% of your new ARR target, depending on the sales engine and geography.
For SMB deals that have shorter sales cycles and can be spun up faster than enterprise deals, you can assume a smaller ratio. I’ve seen high velocity companies that need less than 2x pipeline because they are so efficient.
For example, if you want to close $10M in SMB deals in Q2, at a 2x target pipeline ratio, you need to generate $20M opportunities across all your channels.
Over Assignment: The number of leads needs to be based on Quota, which is between 20% to 30% higher than Financial Plan if you’ve over assigned your sales number.
The Marketing targets need to align with the quota you’ve put on the street.
That means you can’t link it to the financial plan, as you’ll end up with a gap and set up your sales people to come up short.
Sales Generated Pipeline: Marketing is not responsible for all pipeline - much of it is sales generated. Sales people are marketers for the company, too (they just don’t like to admit it). It’s common for sales teams to take at least 20% of the burden associated with generating pipeline.
We reduce the required number of leads marketing is on the hook for supplying by an agreed upon percentage that sales kicks in.
The same thinking applies if you are a channel driven organization, or sell through a marketplace like AWS or Vendr. The associated pipeline contributed from these partners should reduce the marketing targets as well.
Product Driven Pipeline: If you are a Product Led Growth (PLG) org, the same thinking applies. The product should drive a certain number of registrations, which reduces the number of net new leads the marketing team is responsible for generating.
Often, though, Product Qualified Leads (PQL) coming from the PLG motion are embedded into the marketing number, so it’s less a reduction, but rather an inclusion, to the number the marketing team gets credit for.
The Funnel
Pipeline Sources: In my simple mind, there are five lead sources. Each contributes a percentage towards the Segment’s overall contribution.
PQL (Product qualified lead): Someone who’s experienced value from using your product as a result of a free trial
These are generally the highest quality leads
Website: Someone who’s registered for something on your website
This could be an eBook, or they fill in a contact form
Conference: Someone who’s given you their contact info at a conference
Business cards
Paid: Someone you are able to track down based on paid advertising
These are generally the lowest quality leads
Outbound / Account Based Marketing (ABM): Hyper-specific outbound
These are generally reserved for Enterprise, as it’s very targeted / personal, and more expensive to execute
Funnel Stages:
Top of the funnel: Anyone you are trying to attract and get to know better.
MQL (Marketing Qualified Lead): An individual or organization that has engaged with your marketing efforts and could become a customer with proper nurturing.
SAL (Sales Accepted Lead): A marketing-qualified lead (MQL) that has been reviewed and accepted by the sales team according to lead scoring criteria
The difference between an MQL and an SAL is usually the buyer’s intent - are they actually serious about buying, and do they actually have budget
Opportunities: SAL’s become Opps once the sales team decides to work them and can estimate a timeline to close.
Get this number right, and then work backwards
So when you model it out, mathematically it will flow as Opps, SAL, MQL, Top of Funnel
Grossing it all up
Working backwards: The lead funnel calc really works backwards, grossing up each step based on expected conversion rate. Before we go deeper, you can find a downloadable template below: