Advertising Budget: How to Set a Number You Can Defend

Determining an advertising budget is one of the most consequential decisions a marketing leader makes, and one of the least well-reasoned. Most budgets are set by precedent, politics, or gut feel dressed up as strategy. The businesses that get it right treat budget-setting as a commercial exercise, not a negotiation.

The core question is straightforward: how much should you spend to generate the returns your business needs? Answering it properly requires understanding your revenue targets, your cost of acquisition, your market position, and the channels available to you. Everything else is detail.

Why Most Advertising Budgets Are Set Wrong

I have sat in budget meetings across a lot of organisations, from early-stage businesses to large listed companies, and the process is almost always the same. Someone takes last year’s number, adjusts it by a percentage that feels politically acceptable, and calls it a plan. The resulting budget has almost no relationship to what the business actually needs to grow.

There are a few reasons this happens. Finance teams are trained to treat marketing spend as a cost, not an investment. Leadership often lacks the commercial vocabulary to interrogate marketing numbers with the same rigour they apply to headcount or capital expenditure. And marketing teams, if they are honest, sometimes prefer the ambiguity because it protects them from accountability.

The result is budgets that are either too small to move the needle or too large relative to the return they generate, and in both cases, the underlying logic is never examined closely enough to know which problem you have.

This is one of the areas covered in the Marketing Operations hub on The Marketing Juice, which looks at how marketing functions are structured, resourced, and measured in practice. Budget-setting sits at the centre of all of it.

What Are the Main Methods for Setting an Advertising Budget?

There are four approaches that come up repeatedly in practice. None of them is perfect in isolation, but understanding what each one is actually measuring helps you decide which to lean on.

Percentage of Revenue

This is the most common method. You take a percentage of either last year’s revenue or projected revenue and allocate it to advertising. The percentage varies significantly by industry, business model, and growth stage. Consumer businesses typically spend more than B2B businesses. High-margin categories spend more than low-margin ones. Challenger brands spend more than incumbents defending established positions.

The appeal is simplicity. The problem is that it is fundamentally backwards. Revenue should be the output of your marketing investment, not the input. If you set your budget as a percentage of last year’s revenue, you are essentially saying: we will spend in proportion to what we have already achieved, regardless of what we are trying to do next. For a business trying to grow, this is a structural constraint. For a business in decline, it accelerates the problem.

Forrester has tracked how B2B marketing budgets fluctuate relative to broader business conditions, and the pattern is consistent: budgets tend to follow revenue rather than lead it. That is the wrong direction of travel for any business serious about growth.

Objective and Task

This method starts with the business objective, defines the marketing activities required to achieve it, and costs those activities. The budget is the sum of what it takes to do the work.

It is more rigorous than percentage-of-revenue and forces a direct connection between spend and outcome. The weakness is that it depends on the quality of your assumptions. If you do not have reliable data on conversion rates, cost-per-click, or cost-per-acquisition, the task-costing exercise becomes speculative. You end up with a number that looks precise but is built on estimates.

That said, it is the method I would recommend as a starting framework for most businesses, because it at least asks the right question: what do we need to achieve, and what will it cost to get there?

Competitive Parity

This approach sets your budget relative to what competitors are spending. The logic is that if you spend significantly less than the market, you will lose share of voice and, over time, market share.

There is something to this, particularly in mature categories where brand salience drives purchase decisions. But it has obvious limitations. You rarely have accurate data on what competitors are actually spending. And even if you did, matching their spend assumes their allocation is correct, which is a large assumption to make.

I have seen businesses chase competitor spend in categories where the competitor was frankly wasting money. Competitive parity as a principle is reasonable. Competitive parity as a primary budget-setting method is a way of outsourcing your commercial judgement to someone else.

Affordability

This is the least sophisticated method and the most honest description of how many smaller businesses actually operate. You spend what you can afford after covering costs. It is reactive rather than strategic, and it almost always results in underinvestment during the periods when advertising would generate the highest return.

The affordability method is understandable as a constraint. It is not defensible as a strategy.

How Do You Build a Budget That Connects to Revenue Targets?

Working backwards from a revenue target is the most commercially coherent way to set an advertising budget. It requires a few inputs that not every business has cleanly, but the exercise of trying to find them is valuable in itself.

Start with your revenue target. Then identify what proportion of that revenue needs to come from new customer acquisition versus retention and upsell. Focus the advertising budget on the acquisition portion, since retention is typically handled through CRM and owned channels rather than paid media.

From there, you need your average order value or customer lifetime value, and your target cost-per-acquisition. Divide the revenue you need from new customers by your average order value to get the number of customers required. Multiply by your target CPA to get a budget figure.

Early in my career, I ran a paid search campaign for a music festival at lastminute.com. It was not a complex campaign by any modern standard, but within roughly a day we had generated six figures of revenue from a relatively modest spend. What made it work was not the sophistication of the execution. It was the clarity of the numbers going in: we knew what a ticket was worth, we knew what we were willing to pay to sell one, and we sized the campaign accordingly. The budget was a consequence of the commercial logic, not a number someone had picked in advance.

That principle scales. Whether you are running a small e-commerce business or managing hundreds of millions in ad spend across a large agency, the underlying logic is the same. Revenue target drives customer acquisition target, customer acquisition target drives CPA threshold, CPA threshold drives budget.

What Role Does Channel Mix Play in Budget Decisions?

Channel selection and budget allocation are inseparable. The same total spend distributed differently across channels will produce materially different results, and the optimal mix varies by business, category, and stage of growth.

Performance channels like paid search and paid social give you relatively direct feedback on cost-per-acquisition, which makes them easier to budget for with confidence. Brand and awareness channels are harder to measure in the short term but often drive the efficiency of performance channels over time. Businesses that cut brand spend to protect performance budgets sometimes see their performance metrics deteriorate over the following quarters as the brand halo effect diminishes.

The marketing process question that matters here is sequencing. Are you trying to build awareness, generate consideration, or convert demand that already exists? Each stage requires different channels and different budget logic. Conflating them is one of the most common reasons advertising budgets underperform.

When I was growing an agency from around 20 people to over 100, one of the clearest lessons was that channel allocation arguments inside client organisations were almost always proxy arguments for something else: whose team owned the budget, whose metrics got reported to the board, whose work was easiest to attribute. The channel mix conversation is a commercial conversation, but it rarely stays purely commercial for long.

If you are thinking about influencer as part of your channel mix, Later’s influencer marketing planning resource is a reasonable starting point for understanding how to approach budget allocation in that space.

How Do You Handle Budget Conversations With Leadership?

This is where most marketing leaders lose ground. They present a budget as a request rather than a recommendation with commercial logic behind it. Leadership, quite reasonably, pushes back. The marketing leader either capitulates or escalates emotionally, and neither outcome is good.

The framing that works is investment with expected return. Not “we need £500,000 for advertising next year” but “to hit the revenue target, we need to acquire X customers at a CPA of Y, which requires a budget of Z. Here is what happens to the revenue forecast if we fund it at 80% or 60%.” That is a conversation a CFO can engage with.

Forrester’s work on marketing operations design consistently points to the same structural issue: marketing functions that lack commercial credibility inside their organisations get treated as cost centres. The budget conversation is one of the primary places where that credibility is built or lost.

I learned this the hard way early on. In my first marketing role, I asked the MD for budget to build a new website. The answer was no. I could have accepted that and moved on. Instead, I taught myself to code and built it. That was a specific solution to a specific problem, and I am not suggesting everyone should learn to code. But the principle it taught me has stayed with me for twenty years: when you cannot get the resource you need, you either find a way around the constraint or you make the commercial case more compellingly. Giving up is rarely the right answer.

When budget is genuinely constrained, the right response is to be explicit about the trade-offs. What will we not do? Which targets become unrealistic? That transparency is more useful than a budget that looks acceptable on paper but cannot deliver what the business needs.

What Does Incrementality Have to Do With Budget Sizing?

Incrementality is the question of whether your advertising spend is actually causing sales, or whether those sales would have happened anyway. It is one of the most important and most underused concepts in budget-setting.

Most performance marketing channels will show you impressive attribution numbers. Last-click attribution in paid search, for example, will credit the channel with a large share of conversions, many of which were driven by someone who was already going to buy and simply used a branded search term as the last step. The channel looks efficient. The incremental contribution is much smaller.

This matters for budget-setting because if you are sizing your investment based on attributed revenue rather than incremental revenue, you are almost certainly overspending in some channels and underspending in others. The channels that are easiest to attribute are not always the channels doing the most work.

Having judged the Effie Awards, I have seen the full range of how businesses think about marketing effectiveness. The entries that stand out are not the ones with the most impressive ROAS figures. They are the ones that can articulate what the advertising actually caused, not just what happened around the same time as the advertising. That distinction is at the heart of incrementality, and it should be at the heart of how you think about whether your current budget is working.

How Should You Treat Testing and Learning Within the Budget?

A proportion of the advertising budget should always be reserved for testing. Not because testing is intrinsically valuable, but because the business environment changes, new channels emerge, and the assumptions underlying your current allocation will eventually become wrong. A budget with no testing component is a budget that cannot adapt.

How much to reserve depends on the maturity of your current channel mix and the rate of change in your category. A business with a well-established and stable paid search programme in a low-volatility category can afford to test with a smaller proportion than a business in a fast-moving consumer category where platform algorithms and audience behaviour shift quickly.

The discipline required is treating test budget as genuinely separate from core budget. I have seen test budgets raided to cover shortfalls in core channels more times than I can count. When that happens, the business loses its ability to learn, and the next budget cycle starts with the same assumptions as the last one.

HubSpot’s guidance on setting lead generation goals touches on the relationship between targets and resource allocation, which is relevant here. The point is that your testing budget should be sized relative to the learning you need, not as a percentage of whatever is left over.

What Are the Most Common Mistakes in Advertising Budget Allocation?

A few patterns come up consistently across the organisations I have worked with and the campaigns I have overseen.

Anchoring to last year’s number is the most pervasive. It feels safe because it has precedent, but it means the budget reflects historical conditions rather than current opportunities or constraints.

Treating all channels as equally measurable is another. Businesses apply the same ROI expectations to brand awareness campaigns as they do to direct response campaigns, which is a category error. Awareness advertising is an investment in future conversion efficiency, not a short-term revenue generator. Judging it by short-term revenue metrics will always result in underinvestment.

Setting the budget before setting the strategy is a third. The budget should be a consequence of the strategy, not a constraint that shapes it after the fact. When the number comes first, the strategy becomes an exercise in fitting ambitions to a predetermined figure, which rarely produces the best outcome.

And failing to account for seasonality is a fourth. Distributing budget evenly across twelve months when demand is concentrated in three or four of them is a straightforward way to underfund the periods that matter most. The inbound marketing process frameworks from Unbounce are useful for thinking about how demand patterns should inform channel and timing decisions.

If you want to go deeper on how budget decisions sit within the broader structure of a marketing function, the Marketing Operations hub covers the operational and commercial frameworks that underpin how effective marketing teams are built and run.

About the Author

Keith Lacy is a marketing strategist and former agency CEO with 20+ years of experience across agency leadership, performance marketing, and commercial strategy. He writes The Marketing Juice to cut through the noise and share what works.

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