E-commerce Budgeting #ecomchat – Key Points

November 5, 2012

James

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This week’s #ecomchat was on E-commerce budgeting – how to build an e-commerce budget. This is a really interesting debate because every company I have worked with has a different take on budgeting, even if there are many similarities. There are two key schools of thought:

Top down – start with a number then cascade this down through work streams to allocate spend.
Bottom-up – start with targets across key work streams then flow this up into an investment plan.

The biggest challenge for e-commerce teams is to understand how to create a sensible budget that can be achieved. The temptation is to get over-excited and put down numbers that are unrealistic given resource (people and money) limitations.

Summary of E-commerce Budgeting #ecomchat comments

Below is a summary of the key discussion points and links to related/interesting content on E-commerce Budgeting. For a full download of the chat session, run a search on the hashtag “#ecomchat” in Twitter.

Question 1 – How do you build an e-commerce budget – from the top down (£ value, then cascade across programs) or bottom-up (driven by targets like CPA)?

General consensus that budgets should be set against business goals and objectives, not to support a target that isn’t well though through. Key point by @BennaP that often senior management sets ambitious sales targets without taking into account the key metrics required to achieve them and the investment level that would be required to support this.
@Dave_Furness raised a point about market context and competition – you need to understand what the competition is and the state of the market (which also includes economic influences) before thinking about numbers.
E-commerce can be tougher than other areas of the business to plan budgets, raised by @danbarker, due to the challenge of deciding how to allocate investment between the platform and the marketing channels – how do you allocate spend to technical development based on ROI projections?
@robeasson suggested that ROI is an important part of budgeting and should be measured by what the business levers/objectives are – ROI targets will differ if the target is growth or profitability. For example, the business could base its budget on a lower ROI to drive customer acquisition, or it could target a maximum ROI by focusing on profitability across all channels but this could be at the expense of overall growth.
An interesting point about the definition of ROI was raised by @SofieMoulin – what does ROI mean to your business and how is that term being used? Not everyone has a good handle on what ROI is. For example, do you fully cost an ROI projection, taking into account all overheads as well as direct costs like marketing spend?

Question 2 – How do you allocate your budget to different channels/projects? (or how do you pitch for budget & what do you think works best?)

@Feiner explained that as a Consultant, he is finding it increasingly important to create a business case/financial model when communicating to senior managers. The theory and detail is useful but the contribution to the business is what encourages investment.
@DanielMColeman asked the question “what sort of business lets you justify budget without a business case/model?”. Several reasons and examples were given, including a Client who had a model but never used it and the activity of competitors as providing a ‘good’ enough reason to invest without a proper business plan.
@JamesGurd suggested the best approach to deciding where to allocate budget was to start with the top level business goal and then map out what is required to deliver that, the ideal world scenario of technology, process & marketing. Then decide what is the ‘optimal’ investment based on resource available + impact of each option.
How do you budget for social media, like Facebook marketing? @SofieMoulin and @danbarker debated the potential options, including treating it as brand marketing with no fixed financial goals but using a trial budget and them evaluating the impact. This indicates that budget allocation isn’t always tied back to financial models but there is also an allocation for brand investment.

Question 3 – Who in your experience drives the e-commerce budget? E-commerce person/Marketing/IT/Board?

@Jamesgurd said that in his opinion it should always be the person with the most e-commerce experience but this is not always the case. For example, sometimes an IT Manager sets the budget, or a Financial Controller. However, whilst these people should be involved in budgeting, they shouldn’t have ownership unless they have a thorough understanding of how an e-commerce platform really works.
General feeling that there isn’t enough e-commerce experience/knowledge at Board level which can make it hard when fighting for budget – lack of detailed comprehension of investment models
@SofieMoulin explained that Client side teams involve their agency partners in the budgeting process to tap into their expertise. This is really important as they will deliver some of the work that is included in the financial model, so the numbers need to be realistic to give them a chance to deliver the work within budget.

Key take away

Setting an e-commerce budget is not an easy task. It’s helpful for companies to build a financial model based on their business goals & objectives, then input financial data to see what impact this has on investment costs and ROI. Having a flexible input model saves time and money as the business can re-run the numbers based on different investment scenarios and determine which levers deliver the desired results.

However, it should be remembered that a budget is not to be set then left to collect dust. The budget needs to be reviewed and updated regularly based on actual results and learning. Then over time your budget will evolve into a reliable and robust financial model.