November 27, 2012 - FILED UNDER Agile Business
How to Budget if you’re Agile
Becoming a more agile organization isn’t easy. There are so many nuances to keep in mind that we even decided to dedicate an entire section of our blog to helping people successfully pull it off. Today, I want to call your attention to a particular challenge of becoming agile that you might not have thought about: budgeting. Typically, the finance department runs on an annual budget. For agile departments, planning that far advance can be really difficult and confusing. How am I able to plan out the budget for an entire year, if I only really know what activities I’m doing for the next 2 months?
Does this sound like a problem that you and your department have faced? Well if it does, then you are in luck. About a week ago, I came across a great post by agile marketing enthusiast, Jim Ewel, off his blog, Agile Marketing.net, that talks about this very issue.
One radical solution Ewel suggests is to toss out yearly advanced budgets all together. “Too much can change, and a yearly budget for most businesses is an approximation, and often not very accurate,” writes Ewel. Now admittedly, this is a pretty radical shift and may overly rock the boat. Few organizations are open to that level of change. Ewel admits that while he believes that this is the best solution, it’s also the most radical and therefore difficult to implement. If you’re a little concerned here don’t worry, as Ewel also offers a more sedate alternative to this problem.
“Base your budget not on marketing activities, but by understanding the average lifetime value of a customer, as well as the average cost of acquisition of that customer, and marketing’s portion of that cost of acquisition,” suggests Ewel. So in other words, budget on your goals. So, let’s say you need to grow your sales (aka acquire more customers) by a certain amount in the next quarter. Let’s assume that your goal is to acquire 50,000 new customers in the next year, and the average lifetime value of a customer is $500. Let’s also say did some data crunching and came up with the marketing cost associated with acquiring that customer is 15% of the average lifetime value of that customer ($75). Then your budget for acquiring new customers for the New Year is $3,750,000 ($75 x 50,000), it’s that simple. If you are still a little hazy here, I recommend checking out Ewel’s entire article on the subject as he goes through a couple more examples.
Analyzing and understanding your marketing costs in this new way not only makes budgeting easier, but also has a whole heap of other benefits. For example, as Ewel points out this helps “focus you on the right goals: acquiring new customers and the revenue that they bring with them.” Additionally, by adopting this strategy helps you and your team become more flexible. No longer will changing goals pose such a significant challenge to you and your team. Crafting your marketing budget in this manner allows you to better evaluate your marketing activities. It allows you and you team to be able to quickly draft up an image of what it takes to achieve certain goals and whether or not they are realistic. So there you have it, some quick and simple ways to tackle that challenge of learning how do budget now that you’re agile.