eCom Unity #15 - How To Plan Your Marketing Budget

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Deep Dive | Turning Forecasts Into Marketing Strategy

End of last year, I shared an eCommerce Profitability Forecasting Model with you.

It’s built for brands to predict future revenue and margin based on historical cohort performance.

Planning is a crucial exercise. Especially in eCom where margins are tight and you can’t afford to overinvest in overhead costs.

And where buying too little inventory can seriously harm your growth, and buying too much can quickly put you into cash flow issues.

Thus, planning is something the entire org needs to be involved in.

But unlike most people, I think marketing needs to be in the driver’s seat here, as they are the ones that are going to be held responsible for topline revenue figures as well as marketing spend (likely the largest variable costs in the P&L).

While the model I shared will forecast revenue based on historical data, it relies on you inputting your marketing spend and customer acquisition costs, to forecast new customer revenue.

Last week, I received an email on how to best do that:

Everything he outlined here is right in theory.

But not how I would think about it.

The notion that the more you spend on ads, the less efficient they become is correct.

But this is not something that I would consider unless I am already at a massive scale and/or have really ambitious growth targets (let’s say grow 300% YoY).

At a mid-sized eCom brand doing 30m in revenue that wants to grow 30%, one or two good new creative angles that unlock a new target audience can already be all that you need to accomplish this.

This is not something you can model for and in most cases, you don’t want to grow enough for these diminishing returns to have a significant impact on your efficiency.

I would approach this topic differently:

Use the forecast model as your foundation and then set targets that you want to reach and see what is needed to get there.

A bad example of this would be that you want to grow 30% while keeping efficiency (MER) steady. But this is not ideal because this would mean that your new customer acquisition (the primary goal of ad spend) is likely getting worse.

And your CACs might get to a point where you have long paybacks and are creating unprofitable cohorts.

Instead, here is what I would do:

1. Set a CAC Target: Define how much you can pay to acquire a new customer.

2. Set a CM3 Target: Establish a Contribution Margin 3 (CM3) goal for the year.

Now, input the CAC number into the model and adjust the marketing budget until you reach at least your total CM3 target for the entire year.

Now, there are a few things that can happen here:

# of new customers needed to acquire seems perfectly reasonable:

This might be a sign that your targets for the upcoming year are not ambitious enough so you might want to increase them.

# of new customers needed to acquire seems impossible:

If this is the case, you need to start from the top. There is no point in having a plan that you won’t be able to reach anyway.

Using this plan will only lead to you buying too much inventory and building up too much overhead, which will be the beginning of the end.

# of new customers needed is achievable, but not at the target CAC:

This is an interesting one. And one where the model can be really helpful.

Take a look at what happens to your total CM3 if you increase your CAC.

The impact might not be as drastic as you anticipate. And if your CLV/CAC ratio is not at the ideal spot, but even leads to larger lifetime profits.

However, if this is not the case, you can also start modelling from the retention side and see how much you need to improve CLV to be able to afford such a higher CAC to still reach your CM3 goal.

# of new customers needed is ambitious but achievable

This is ideally where you want to end up.

You have a plan that you feel you can achieve with a 70% confidence level.

You might not know 100% yet how. But you think if you can execute well, you can definitely achieve this and maybe even overachieve it.

But this is really where all the fun just begins and it’s your time as a marketing leader to shine.

You now have your targets and now you must define with your team a strategy and the inputs necessary to reach that target.

This defines your roadmap for the year.

I know I am a little late with this topic given that the year has already started, but I see many brands that don’t have clear targets set for the year.

So if this is the case for you as well, I would advise you to still do it.

That being said, I want to spend a significant amount of time later this year to prepare some even more in-depth content on planning in time for the planning season for 2026 🙈 

So, if there are any things that you are particularly interested in or questions that you have, please send them to me now already.

That way I can use them later.

p.s. If you missed the model, you can still grab it here: Profitability Forecasting Model.

Thank you for reading :)

I am on a mission to help eCom brands build better, more profitable businesses. If you missed any past issues, you can catch up on all of them here.

I have built one 8-figure and one 9-figure eCom brand in the past and with Klar, I work with over 700 eCom brands today.

If you have specific questions you would like me to cover next, just reply to this email.

Have a great week.

Max ✌️

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