Burhanuddin Pithawala

Notes on Growth and Marketing for Startups in India

What will happen to your Company – if you made the Marketing Budget “ZERO”

Meme on Marketing Jargon versus reality Blake

It’s another Monday morning, Fresh into the week I usually spend an hour reviewing the Daily, Weekly, and Month to Date numbers. Once Done, I usually return to adding more ideas to my favorite ‘ideas list’ – “what all things we can do to grow faster”. But the day is anything but normal. I get a surprise call from my boss and a few seconds later the unholy question

What if we made our marketing budget “ZERO“?

I am not sure if anyone like me, would have chosen to become a marketer, to answer this question, which is nothing but an existential threat. After all, why do you need a marketing team if there is no budget to manage? Moreover, why do you need a marketing head, if you don’t need a marketing team in the first place? And so the saga begins.

While as a marketer you never read a textbook that tells you to ‘Not do Marketing’. But, this question is not at all uncommon and usually pops up more often during downturns, and cost-cutting phases (ex: during covid 2020 times, the current recession times), but having an answer at all times is crucial for setting up a baseline for your growth marketing budgets pragmatically. In fact, having a clear answer can actually help you in understanding your business and within that the role of marketing more confidently.

So let’s understand where we start. To begin with, you need 2 pieces of information 

  1. What’s your cycle time 
    •  If you acquire a user today, how exactly will they give business over say next 3 months, 6 months, or 1 year?
  2. What is your New Users – Channel mix
    •  Where do they come from – Organic, Paid Marketing attributed channels and so on

Let us look at both one by one

1. Business Cycle Time Explained

Business Cycle time – How the Signups in a month, lead to transactions

Typical ECommerce Example

  1. 100 new users signup in a month
  2. 50 users transact in the same month say 50 transactions
  3. 20 transactions in month 2
  4. and let us say 10 transactions every month from there onwards, from the initial 100 new users

Putting the same into a google sheet for modeling.

Model for Transactions over time from Users acquired in a specific month. M0 stands for the same month, while M1 means month + 1, and so on. Link to the Google Sheet for Modeling

Note: Highlighted in Orange – 110 in Jun is coming from respective previous month cohorts highlighted in Orange

2. Channel Mix of Acquisition Explained

To keep it simple, every marketing team relies on some sort of attribution to determine where did a particular user come from. This helps in allocating costs to channels where the return on ad spending makes economic sense.

For simplicity, let us divide the entire acquisition into 2 main buckets

  • All paid marketing is bucketed under the paid tag (say it contributes to 40% of the new users)
  • All free users are bucketed in organic, and the contribution to new users from organic is 60%. (Organic is generally non-attribution more than channel attribution, but more on this later.)
Business Cycle time Chart, overlayed with the Channel Mix (i.e. Paid and Organic Sources). The assumption here is that cycle time here stays the same across channels.

Lets put this back into our model, again

Scenario 1: As shown above, Stable State when both organic and paid channels are on. Splitting the Contribution from Paid and Organic Sources. Link to the Google Sheet for Modeling

Now lets turn off the Paid Channels from say, July and see what happens

Scenario 2: Stable State when paid channels are switched off from Jul onwards. The new stable state slowly converges to (the rolling organic state + business from repeat usage of initial paid users) Link to the Google Sheet for Modeling

A New Trendline emerges which is a convergence to the rolling organic state + repeat usage of previously acquired paid users.

The reduction due to switching off paid channels has its full effect over a period of 3 months.

Thought Experiment for the reader : How much time it will take for the business to come back to the full scale when we switch the paid channels ‘ON’ back again?

Answer is 3 months again

In Conclusion – What if we made our marketing budget zero?

If we make the marketing budget zero, the business will converge to the business from the New and Repeat Organic users plus the Repeat Paid users. At the same time, the full impact on business will be visible only after the cycle time of the user (i.e. 3 months in this case). Therefore for very long cycles, switch-off and on decisions should be taken very carefully, and ideally monitored closely at cohort levels.

But I am sure, you are thinking this is way too simply explained and reality is much more colored than this. So let us now deep dive into the full dimensionality of the problem.

4 types of marketing budget
4 types of marketing budget

There are broadly 4 categories of Marketing Budget, and here’s how you measure the effectiveness of each one of them

  1. Acquisition Budget – Ability to acquire new users on the platform
  2. Discounting Budget – Ability to improve revenue or conversion from a user
  3. Activation / Engagement Budget – Ability to bring a user back to the platform and make them transact or engage
  4. Brand Budget – Ability to solve a larger problem of Brand Perception or Acquire users when performance marketing has hit the ceiling.

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