Risk

The experimental budget is probably one of the most misunderstood concepts in startup culture.  Founders and investors want predictability.  Marketers want creative freedom.  This friction is the source of many disagreements and misunderstandings.

Founders and investors don’t understand why marketers want marketing budget that they cannot guarantee will return in terms of revenue.  Marketers want more experimental budgets so that they can practice their creative craft.

The truth lies somewhere in the middle.  Marketers cannot have unlimited budgets with no predictability, founders and investors cannot demand 100% predictability.  There must be a balance.

 

Art and Science

To the frustration of many chief financial officers, marketing is equal parts art and science.  While the ultimate goal is a predictable return on investment for every marketing dollar, it’s necessary to experiment with unpredictable methods to find predictability.

The key is a healthy balance between predictable marketing campaigns and budgets and experimental.  Mature companies should aim for a balance of about 70% predictable and 30% experimental.

 

Factors

While it would be ideal to put 100% of your budget into a predictable set of campaigns, there are a few factors that make this impossible.

 

Constant change

Like it or not, the marketing world is constantly changing at an ever-increasing pace.  New marketing and advertising methods emerge every day and it’s important to stay on top.  If you stick with the same set of advertising and marketing methods you will eventually slip behind your competitors.

 

Fatigue

Even really good marketing campaigns grow old over time.  As people get used to seeing the same message it loses its effect.  Even the really best marketing campaigns are only as effective as their rate of market saturation and audience fatigue.

 

Innovation

Marketing is a creative field and it’s impossible to have thought of every approach.  You can always do better and the only way to get better is to experiment through research and development. This is the artistic side of marketing.

 

Types of campaigns

This concept of balance applies to all types of campaigns: Online and offline, paid and organic, inbound and outbound, social media or pay-per-click, etc.

 

Early-Stage Startups

When you first enter the market, there is no predictability.  It’s all experimental.  Your first goal is to find something that you can hang your hat on.

Here is a strategy and outcome that companies in this position should shoot for:

Start by trying out seven different campaigns.  For example, if you are an inbound organization, maybe it’s four paid Facebook campaigns, two display campaigns, and one booth at a conference.  In baseball terminology, four will be strikeouts, two will be base hits, and one will be a home run.

Step two: Once you have found your home run, double down on that campaign. Tweak the base hit campaigns using some split testing. Toss out the four strikeouts.

Repeat this process two or three times until you have a handful of home runs that will make up your predictable budget.

 

Lead Source Attribution

It should go without saying but it’s important to note that you should not run any campaigns before you set up an effective lead source attribution and reporting system. The only way to know the difference between a home run, a base hit, and a strikeout; is to look at detailed analytics about how much revenue was created from each dollar of advertising.

 

Stabilization

Once you have that handful of home runs as your predictable budget, you can move to a stabilization mode. In this stage, 70% of your budget in terms of time and money should be spent on the predictable campaigns.

30% of the budget is for research and development. This is where you’re constantly trying seven new campaigns. As you find your home runs, rotate them into your predictable budget.  As your stabilized campaigns begin to fatigue, rotate them out.

 

Rinse and Repeat

Continue this process indefinitely and tweak it to your own needs. This 70/30 split should satisfy both the needs of your investors, founders and your creative marketers. Take some time to explain this technique early on to create buy-in and understanding. This will help you to avoid misunderstandings down the line.