Budgeting For E-commerce & Digital Marketing
Budgeting is a crucial part of running successful e-commerce. As resources are limited, it is vital to allocate our resources wisely to ensure the highest return outcome. Without an unmistakable thought of budget, it is easy to overspend where we should underspend and underspend where we should overspend, which will lead to missing the opportunity for growth.
As we are reaching the end of 2022, it is an exciting time to work on your 2023 budget if you haven't already. Before going through some consideration and preparation before starting work on your 2023 budget, it is to understand why budgeting for e-commerce is crucial for e-commerce. The e-commerce industry is volatile, with many changes in supply and demand, technology, and consumer preferences.
So without a detailed, thought budget, it is easy to mistake motion for action, as it is easy to overlook the actual cost of your growth or the profitability of your e-commerce business.
While budgeting is a finance function, I believe that the growth team and digital team need to be invited to contribute to the budget creation process, ensure the validity of the assumptions implied and the quality of the forecast used in building the budget but not just forecast for growth but more importantly to foresight the potential setbacks from the increase in competition and the increase in advertising cost and account realistically for each possible set back.
Here are three points to consider before starting budgeting and planning for your e-commerce:
Collect all your historical data, from sessions to net revenue and everything in the middle
Use an easy-to-use template for your data, year over year and month over month. I found it is very useful to dedicate seasonality and shift in customer preference over time
Understand your business goal; which kind of growth is your business looking for, sustainable year-over-year growth or hyper-growth? Understanding this alone will help you achieve better budgeting and forecasting
Top-down vs. bottom-up budgeting for e-commerce
When it comes to budgeting for e-commerce and digital marketing, there are two main approaches: top-down and bottom-up. Both approaches have their own pros and cons, and which one is best for your business will depend on your specific needs and goals. In this article, we'll take a closer look at each approach and explore the benefits and drawbacks of each.
The top-down approach to budgeting starts with a high-level overview of your business goals and works its way down to specific budget allocations. This approach is often used when a business has a clear idea of its overall strategy and wants to allocate resources accordingly.
Top-down budgeting is a method in which the budget is set by top management and then allocated to lower levels of the organization. This approach is often used when a business has clear financial goals and a clear idea of how much money is needed to achieve those goals. It's also often used in cases where the budget is fixed and cannot be changed, such as when a business is working with a grant or investment.
One advantage of the top-down approach is that it allows for a more holistic view of the business. By starting with the big picture and working your way down, you can ensure that all of your budgeted expenses align with your overall goals and strategy.
Top-down budgeting allows for clear, centralized decision-making. Since the budget is set by top management, there is less room for conflicting priorities or differing opinions about how to allocate resources. It also helps to ensure that all departments work towards the same financial goals and that resources are being used efficiently.
However, there are also some drawbacks to top-down budgeting. One of the main challenges is that it can be difficult to accurately predict the exact amount of money that will be needed to achieve a business's goals. This can lead to under or over-budgeting, which can have negative impacts on the business's financial health. Additionally, top-down budgeting can be inflexible, as it may be difficult to change the budget once it has been set.
For example, suppose you have a limited budget for marketing. In that case, it may be hard to know exactly how much to allocate for specific tactics such as social media advertising or email marketing. This can lead to over- or under-budgeting, which can impact your overall financial health.
The bottom-up approach to budgeting starts with specific budget allocations and works its way up to the overall business goals. This approach is often used when a business has a clear understanding of its specific needs and wants to allocate resources accordingly.
Bottom-up budgeting, is created by lower levels of the organization and then approved by top management. This approach is often used when a business has a more decentralized structure and wants to allow for more input and decision-making at the departmental level. It's also often used in cases where the budget is flexible and can be adjusted as needed.
One advantage of the bottom-up approach is that it allows for a more detailed view of the business. By starting with specific budget allocations, you can get a better sense of how much you need to allocate for each activity, which can help you make more informed decisions about your spending.
Bottom-up budgeting allows for more input and collaboration from all levels of the organization. This can help to ensure that all departments have a say in how resources are allocated and that all needs are being considered. It also allows for more flexibility and adaptability, as the budget can be adjusted as needed based on changing circumstances or priorities.
However, there are also some drawbacks to bottom-up budgeting. One of the main challenges is that it can be difficult to get buy-in and approval from top management, as they may not have as much control over the budgeting process and understanding of each channel technicality. It can also be more time-consuming, as it requires input and collaboration from all levels of the organization. Additionally, there is a risk of conflicting priorities or conflicting ideas about how to allocate resources, which can lead to inefficiencies and a lack of cohesion.
Ultimately, the right approach to budgeting for e-commerce and digital marketing will depend on your specific needs and goals. But what I will recommend for you, which I do personally, is to do both top-down and bottom-up budgeting, this will give you a clear big-picture and unified goal, and at the same time, you will have a detailed plan on how to reach this goal.
Still, in order to do that, you need to start early and build process's around budgeting which will facilitate your work in the future.
What do you think about budgeting for e-commerce and digital marketing? And in the top-down vs. bottom-up approach? Which one are you using? Share your insights in the comments below!