Why percentage-of-revenue rules break, and the payback calculation that should replace them.
Percentage-of-revenue rules are popular because they are easy, and they are easy because they ignore the two things that actually determine what you can spend: margin and time.
Why the percentage rules break
A business with 80% gross margins and a 70% annual repeat rate can afford to pay far more for a customer than one with 20% margins and no repeat purchase, at identical revenue. The same percentage of revenue is a rounding error for one and reckless for the other.
Percentage rules also break at the moment they matter most. A business trying to double is by definition spending against revenue it does not have yet, so anchoring to last year’s number guarantees under-investment exactly when growth was the point.
The calculation that replaces them
Start with gross profit per customer, not revenue per customer — what is left after the cost of delivering the thing. Then decide how long you are willing to wait to get that money back. A business funding growth from cash flow needs payback inside a quarter; a funded business with strong retention can rationally wait a year.
Gross profit per customer, divided by the payback period you can fund, gives you the maximum you can pay to acquire one. Multiply by your customer target and you have a budget derived from your actual economics rather than from a blog post benchmark.
Split it three ways
Roughly: the majority into what is already working, a meaningful minority into scaling what is nearly working, and a deliberate small slice into things that might not work at all. The last one is the one that gets cut first and is the only reason you will have anything new to scale next year.
Keep the experimental slice small enough that losing all of it is survivable, and protected enough that a bad month does not consume it.
A worked example
A business sells a service at £4,000 with a 45% gross margin, so £1,800 of gross profit per customer. It funds growth from cash flow and can wait one quarter to recover acquisition cost. That sets the ceiling: about £1,800 to acquire a customer, and comfortably below it in practice to leave room for error.
Wanting twenty new customers a quarter, the budget is roughly £36,000 a quarter — media, fees, software and production combined. If the current cost per acquisition is £2,400, the answer is not a bigger budget; it is that acquisition is unprofitable at the current conversion rate, and conversion work is the cheaper fix.
Run the same arithmetic with a 70% repeat rate and the ceiling moves substantially, because the second purchase carries no acquisition cost. This is why two businesses with identical revenue can rationally spend very different amounts.
How the budget should change over time
Early on, most of the spend is buying information rather than customers: which channel, which message, which segment. Expect a worse return and treat the finding as the deliverable. Once a channel demonstrates payback, the job changes to scaling it until the return degrades, which it eventually will.
Set a review point rather than an annual budget. A budget fixed twelve months ahead cannot respond to a channel that starts working in March, and the opportunity cost of that rigidity is usually larger than the discipline is worth.
Count the whole cost
The budget is media plus agency fees plus software plus production plus the internal time to run it. Businesses routinely approve the media and forget the other four, then conclude the channel was unprofitable using a cost base that was never complete.
Include the internal time honestly. Marketing that requires two days a week of the founder is not free, and it is usually the most expensive input in the mix.
When to spend less
When the site converts poorly, when enquiries are not being answered promptly, when the product has a retention problem, or when the sales process cannot handle the volume you already have. Spending into any of those buys you a faster route to the same ceiling.
Fix the constraint, then spend. It is a less exciting answer than a bigger budget and it is almost always the higher return.
Common questions
- What percentage of revenue should go to marketing?
- Commonly cited ranges are 5% to 10% of revenue to maintain position and 10% to 20% to grow aggressively, with B2C generally higher than B2B. Treat these as a sanity check rather than a target: the defensible number comes from your gross profit per customer and the payback period your cash flow can fund.
- How do you calculate a marketing budget from customer acquisition cost?
- Take gross profit per customer — revenue minus the cost of delivering the product or service — and divide it by the payback period you can afford to wait. That gives the maximum acquisition cost per customer. Multiply by your target number of new customers to get the budget.
- Should you cut marketing spend in a downturn?
- Cut the experimental portion before the proven portion, and cut inefficiency before you cut volume. Reducing spend on channels with demonstrated payback shrinks revenue with a lag, which tends to produce a second round of cuts. If cash requires a reduction, shorten the payback period you are willing to fund rather than stopping acquisition entirely.