Ad Budgeting 101 – Applying the 70/20/10 Rule

When you’re a young pup in advertising, everything is a test. You scrape together a small budget and start playing the hits: SEM, SEO, affiliate partnerships, a little bit of Facebook, then a lot of Facebook. You place very small bets and grow them incrementally, knowing you can shut them down in an instant with the stroke of a key. You find success and begin to scale. These tests become core digital channels and your business begins to depend upon them.

Now you’ve had your first taste of success in acquisition marketing and it felt good—really good. But you need to keep feeding the monkey. One day, your customer acquisition costs on Facebook keep getting more expensive, and you’re not seeing the same return at the same scale. You notice your keyword searches are getting a bit more competitive as you look for higher volume at the same efficiency.

Panic sets in, but then you recover. You figure out a way to regain your former position, but you realize something—this cannot go on forever. You must diversify to continue to safely scale. You realize that, to achieve your goals, you’re going to need to do more than just list yourself in search engines. You must create demand. Facebook helps with this, but you can’t be fully dependent on just one channel. It makes you too vulnerable. You know that, at some point, there will be a ceiling.

You talk to your friends and find out that brands like yours have taken the leap into audio and video, telling their stories to larger audiences. They survived the crossover into what can still be called “offline media,” and you realize that you need some help if you’re going to survive too. You call an agency like Oxford Road and tell them of your big plans to dominate your category. You want to know the least amount you can spend on a test, making assurances that if it works you’ll spend more. The difference is now you cannot turn these channels on and off in a day like you could with digital. You have to risk tens, maybe hundreds of thousands of dollars just to find out which channels are going to work for you. It’s petrifying.  

Fortunately, one of your investors has seen offline media work before and encourages you to take the leap, so you do it. During the ramp-up, everything you buy feels like a test, and you fear for your future if it doesn’t work. Not everything works, but enough of it does that you can see the light at the end of the tunnel. You survive, and some of these channels are really taking off. Your friends and co-workers hear your ads on their favorite podcasts, infusing you with a new level of confidence and conviction that you can take this brand all the way. However, you don’t realize that when you’re advertising on proven performance channels that are shared by dozens of other marketers for similar brands, it is less about you testing media and more about the media testing you. It is a game of “Mirror, mirror on the wall,” and this mirror tells you exactly what the market thinks of you. As you mature, you dig deeper into your funnel, optimizing everything. By now, you have built a foundation of demand-generating media: podcast, radio, and possibly even TV.

Congratulations! You’ve crossed over from tiptoeing into channels where every dollar is 100% test to actually having a marketing budget. And while the kid who got your early marketing efforts going may still play a role at the company, you’ve started hiring people with a bit more experience.

You’re now a steady advertiser with quarterly budgets and a roster of proven media channels, but then you start to plateau again. You realize that you’re leveling off and the air is becoming increasingly thin, so you search for new media gems. They’re not as easy to discover as in times past, and it’s getting painful as new tests don’t pan out like the old ones did. So now what?

The older I get, the more I appreciate the wisdom of older brands like Coca-Cola. There is a lot that you don’t have in common with Coca-Cola, but they have spent billions of dollars learning things that can drastically benefit your business, regardless of size. Not the least of these is their now-famous 70/20/10 rule.

The rule is this: 70% of your marketing budget goes to proven core programs, 20% goes to test programs that are highly likely to perform similarly to your core, and the remaining 10% goes to high-risk experiments, a.k.a “crazy shit.” For Coca-Cola, linking this 70/20/10 budget to a performance-based compensation and bonus plan for its ad agency incentivized the agency to operate in and discover unfamiliar—and sometimes groundbreaking—areas. For a performance marketer today, this budget breakdown provides a framework for navigating media in a way that ensures stability while allowing for growth by testing the fringes and exploring new waters.

Most people don’t have the discipline to follow a 70/20/10 model, but you should. Like everyone else, you want to spend to the diminishing returns. But when you start to hit that ceiling, it will serve you well to have a framework that allows you to protect your base and continue to expand incrementally upward. This allows you to take a measured approach to continued growth.

Your core is the 70. The 20 is for things that you aren’t yet buying, but can see that it’s inhabited by comparable advertisers. The 10 is for anything your little heart can dream of—where you can have some fun. Opportunistic deals. Unproven media. Big ideas. Tests for testing’s sake without having to handcuff every dollar to the same KPIs as your core. And the best part is that, once in a while, the 10% will hit a gusher and make up for all of those previous quarters where the 10% felt like a waste.

It’s not very complicated, but it requires forward thinking, planning, buy-in from multiple stakeholders across your org, leadership, and the guts to see it through to fruition. Have you started managing your budget this way? If not, perhaps we should chat.

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