Incremental Budgeting: Stop Rewarding Last Year’s Spend

Incremental budgeting is a method of setting marketing budgets by taking the previous period’s spend as a baseline and adjusting it up or down based on expected conditions. It sounds logical. In practice, it locks organisations into repeating historical decisions regardless of whether those decisions were any good.

Most marketing teams use it by default, not by design. And that distinction matters more than most finance directors will admit.

Why Incremental Budgeting Became the Default

There is a reason incremental budgeting is so widespread. It is fast, it is defensible, and it requires very little original thinking. When a CFO asks why marketing needs £2.4 million this year, “because we spent £2.2 million last year and the market has grown” is an answer that closes the conversation quickly. That is not a criticism of finance teams. It is an observation about how budget cycles actually work inside organisations under time pressure.

I spent years running agencies where clients would come to us in October with a brief that was essentially: “We have roughly the same budget as last year. Same channels, same split, maybe a small test budget for something new.” The brief was written before any analysis had been done. The budget had already been set using last year’s numbers, and our job was to fill it rather than interrogate it.

That is incremental budgeting in its purest form. The number comes first. The rationale follows.

It persists because organisations are optimised for continuity. Changing the budget methodology requires someone to argue for it, defend it to finance, and then take accountability if it goes wrong. Incremental budgeting distributes that risk invisibly. Nobody is blamed for doing what was done last year.

What Incremental Budgeting Actually Measures

Here is the uncomfortable truth about incremental budgeting: it does not measure marketing performance. It measures institutional inertia.

When you take last year’s spend as your starting point, you are implicitly endorsing every decision that produced that number. The channel mix, the agency fees, the campaign structure, the attribution model, the KPIs. All of it gets rolled forward. The question “was this the right spend?” never gets asked, because the budget process does not require it to be asked.

I have seen this play out in ways that would make any commercially minded marketer wince. At one agency I ran, we inherited a client whose display advertising budget had been growing by roughly 8% per year for four consecutive years. When we actually looked at the data, that spend had never been properly attributed. It was generating impressions and nothing else that anyone could trace to revenue. Four years of compounded budget increases, and nobody had stopped to ask whether the baseline was sound.

Understanding what your analytics data is actually telling you is a prerequisite for any budget methodology to work. If your measurement infrastructure is weak, incremental budgeting does not just fail to improve things. It actively makes them worse, because it scales bad decisions. The Marketing Analytics & GA4 hub covers the measurement foundations that make budget decisions defensible rather than inherited.

The channel that grew 8% last year gets another 8% this year. The campaign that underperformed quietly keeps its budget because cutting it requires someone to own that decision. The test budget that showed promise gets the same small allocation it had before, not because it earned it but because nobody recalibrated the baseline.

The Compounding Problem Nobody Talks About

Incremental budgeting has a compounding problem that is rarely discussed openly. Bad allocation decisions do not just persist. They grow.

If you allocate 30% of your budget to a channel that is not performing and then apply a 10% overall budget increase next year, that underperforming channel now has 33% of a larger number. You have not just maintained a bad decision. You have funded it more generously.

This is not hypothetical. KPI reporting in most organisations is set up to measure channel-level activity, not to surface whether the channel deserves its budget allocation relative to alternatives. Paid search gets its report. Email gets its report. Display gets its report. Nobody produces a report that says “here are the three channels competing for the same pound of budget, and here is what each one returns per pound spent.”

Without that comparative view, incremental budgeting compounds silently. The channels with the loudest advocates keep their share. The channels that work quietly and do not have a champion inside the organisation get the same flat allocation year after year.

When I was judging the Effie Awards, one of the things that struck me about the entries that did not make the cut was how many of them were describing campaigns that had clearly been funded out of habit rather than strategy. Good creative, decent execution, but the channel choice and budget split looked like something inherited from a previous year rather than built around a business objective. Incremental budgeting leaves those fingerprints all over a campaign.

Zero-Based Budgeting: The Alternative That Is Harder Than It Sounds

The most common alternative to incremental budgeting is zero-based budgeting, where every pound of spend has to be justified from scratch each period rather than inherited from the last one. In theory, this is exactly right. Every allocation earns its place. Historical precedent counts for nothing. The best use of budget wins.

In practice, zero-based budgeting is genuinely difficult to implement well, and organisations that adopt it without preparation often end up with something worse than what they had before.

The problems are mostly structural. Zero-based budgeting requires detailed performance data at the channel level, which many marketing teams do not have in a form that is reliable enough to make decisions from. It requires internal agreement on what “good performance” looks like across different channels, which is harder than it sounds when paid search, email, and brand activity are being compared on the same scorecard. And it requires a budget process that has enough time and political will to actually challenge allocations, rather than rubber-stamping them under the guise of zero-basing.

I have seen zero-based budgeting used as a cost-cutting exercise dressed up as a methodology. Finance sets a target reduction, marketing is told to justify everything from zero, and the result is that the channels with the clearest short-term attribution survive while anything with a longer payback cycle gets cut. Brand investment, content, SEO, anything that builds over time rather than converts immediately. That is not zero-based budgeting working as intended. That is incremental budgeting with extra steps and a more aggressive baseline reduction.

Understanding what your email marketing data is telling you, what your content metrics actually represent, and how to read channel-level performance without over-indexing on last-click attribution, these are the analytical capabilities that make zero-based budgeting viable rather than destructive.

What a Better Budget Process Actually Looks Like

The most commercially sound approach I have seen in practice is a hybrid that takes the best elements of both methods and avoids the worst failure modes of each.

It works like this. You divide your marketing budget into three categories before you do anything else.

The first category is proven performance spend. These are the channels and activities where you have reliable data showing consistent return. Paid search on branded terms. Email to an engaged list. Retargeting with demonstrated conversion rates. This spend gets protected and scaled modestly if conditions support it. You do not zero-base it because you have enough evidence that it works.

The second category is discretionary spend. These are the channels and activities where performance is harder to measure, where attribution is uncertain, or where the evidence base is thin. This is where you apply something closer to zero-based thinking. Every pound has to earn its place based on what you know, not what you assumed last year.

The third category is test and learn budget. A fixed percentage, typically somewhere between 10% and 20% of total spend, held back specifically for testing new channels, new formats, or new audience approaches. This is not a discretionary slush fund. It has specific hypotheses attached to it and defined success criteria before a penny is spent.

Early in my career, I learned a version of this lesson the hard way. I asked for budget to build a new website and was told no. So I taught myself to code and built it. The experience taught me something useful: constraints force clarity about what actually matters. A budget process that forces you to categorise spend before you allocate it does the same thing. It makes you decide what you know, what you are testing, and what you are guessing, before the money moves.

The Mid-Year Reallocation Problem

One of the structural failures of incremental budgeting is that it treats the annual budget as fixed once it is set. The allocation decided in October or November is the allocation you live with until the following October or November, regardless of what the data shows in the meantime.

This is commercially indefensible. Markets move. Channels shift. A paid social campaign that was performing well in Q1 may have deteriorated by Q3 due to audience saturation, creative fatigue, or competitive pressure. An SEO investment that looked slow in the first half of the year may be compounding into meaningful organic traffic by Q3. If your budget is locked, you cannot respond to either of those realities.

When I was at lastminute.com, we launched a paid search campaign for a music festival that generated six figures of revenue within roughly a day. It was a relatively simple campaign, but the conditions were right and the channel responded immediately. The lesson I took from that was not that paid search is always that responsive. It was that when something is working, you need the organisational flexibility to put more behind it quickly. An incremental budget set months earlier would not have anticipated that opportunity. We needed the ability to reallocate in the moment.

A better budget process builds in formal mid-year review points where reallocation is not just permitted but expected. Not a review where everyone defends their existing allocation, but a genuine assessment of what the data is showing and where the next pound of spend would do the most work.

This requires decent measurement infrastructure. You cannot reallocate intelligently if your analytics setup does not give you a reliable read on channel performance. Understanding how GA4 tracks users and what it is actually measuring is foundational to making mid-year budget decisions that are based on evidence rather than instinct. Similarly, getting your GA4 configuration right before you start reading performance data matters more than most teams realise.

The Measurement Prerequisite

Any discussion of budget methodology eventually runs into the same wall: the quality of your measurement determines the quality of your budget decisions, regardless of which method you use.

Incremental budgeting with good measurement is better than zero-based budgeting with poor measurement. A team that knows what its channels actually deliver and applies modest adjustments to a well-understood baseline will outperform a team that starts from zero every year but does not have reliable data to justify its allocations.

The honest version of this is that most marketing teams are operating with measurement that is good enough for reporting but not good enough for budget decisions. Marketing metrics are often set up to show that channels are active rather than to show what those channels are actually contributing to business outcomes. The distinction between marketing analytics and web analytics is one that many teams still have not fully resolved, which means budget decisions are being made on data that was never designed to inform them.

If you are going to challenge your budget methodology, start with your measurement infrastructure. Not because the methodology does not matter, but because changing the methodology without improving measurement just produces a different set of poorly-informed decisions.

There is more on building the measurement foundation that makes budget decisions reliable in the Marketing Analytics & GA4 hub, covering everything from GA4 configuration to KPI frameworks that connect channel activity to commercial outcomes.

How to Challenge the Baseline Without Starting a War

The practical challenge for most marketing leaders is not understanding that incremental budgeting has flaws. It is knowing how to challenge it without triggering a defensive response from finance, from channel owners, or from the leadership team that approved last year’s budget.

The most effective approach I have found is to separate the methodology conversation from the allocation conversation. Do not walk into a budget meeting and announce that you want to change how budgets are set. Walk in with a channel-level performance analysis that shows what each area of spend has returned, and let the numbers make the argument.

When the data shows that one channel is returning significantly more per pound than another, the conversation about reallocation becomes much easier. You are not arguing for a different budget philosophy. You are arguing for a specific reallocation that the data supports. That is a much more winnable argument.

The second thing that helps is framing test budget as a separate category from the outset. If you ask for 15% of your budget to be held back for testing, you will face resistance. If you build that 15% into your budget proposal as a line item with specific hypotheses attached to it, it becomes a planned activity rather than a request for discretionary funds.

The third thing, and this is the one most marketing leaders skip, is to be honest about what you do not know. Incremental budgeting persists partly because it feels safe. If you want to replace it with something better, you need to acknowledge the uncertainty in your own proposal rather than overselling the precision of your alternative. Finance teams respond better to “here is what the data shows and here is where we are still learning” than to “here is a methodology that will optimise our spend.” The former sounds like a commercially grounded marketer. The latter sounds like someone who has been to a conference.

You can also use GA4 data to inform content and channel strategy in ways that make the case for reallocation without requiring a methodology overhaul. Sometimes the most effective challenge to incremental budgeting is not a budget process argument. It is a well-constructed performance analysis that makes the current allocation look obviously wrong.

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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