Many Ecommerce Businesses Budget Like This
Here are 4 common traps ecommerce brands fall into when handling their financial plan. As we mention these, take a serious look at your business to see if you might be guilty of any of them.
Budgeting on the Fly
A bill comes in or ad costs skyrocket, and suddenly you’re robbing Peter to pay Paul without a real plan in place. We see this a lot — businesses responding to unexpected costs or opportunities without stepping back to see the big picture.
Example: Your ads for a shirt are driving great returns so on the fly you decide to double down on ad spend without proper planning. The rush to feed the marketing machine could expose weaknesses you aren’t accounting for, such as a lack of excellence in your inventory management. What if you’re driving ads to a shirt that was crushing it before, but is now sold out of all sizes but small? Quickly pouring money on that ad could result in lower conversions, lower ROAS and lower overall results.
Under-Budgeting vs. Over-Budgeting
Most fall into one of two traps — either you’re not spending enough on the right things, or you’re spending too much on the wrong things.
This isn’t a matter of just dialing it in to keep things nice and tidy. This will affect your long-term profitability.
Businesses under-budget by not spending enough on key areas like efficient fulfillment or customer retention. That means you are under-acquiring key assets and resources that you need to drive profit.
Over-budgeting happens when you either throw too much money at a single area that doesn’t support long-term growth, or you spread your budget thin and wide by spending a little on everything. Remember, profit-driving activities are most often planned, measured, focused and consistent. Your strategy (and resulting budgeting) should reflect that.
Stop and Think: Think about a time you had to cut a crucial initiative because the business budget was running dry.
- What did it cost your business? Short-term? Long-term?
- If you knew this was coming, how would you have allocated your resources differently in the year leading up to the cut?
Chasing Short-Term ROI: Budgeting for the Outcome
Always chasing short-term ROI is tempting. It’s really easy to fall into the mindset that every dollar you spend should generate a quick, measurable return. It’s easier to measure, easier to track and easier to justify.
But you can’t put a 100% directly-attributable ROI on every inch of what you do. (See an example of this later in the article.)
No Clear Strategy for Investment
Like most consumers — many ecommerce businesses simply don’t have a clear budgeting strategy. And that’s probably because they don’t have a clearly defined strategy for their business in general.
Without a clearly defined business plan and solid strategic planning, it’s easy to waste money on the wrong things and fail to invest where it truly matters.
Stop and Think: Does my ecommerce business have a clear budget strategy — a clear vision of where we want the brand to be in 3-5 years and a budgeting plan to support it?
If you fall into the same business budgeting pitfalls, here’s what you can expect.
What Happens If You Do the Same With Your Budgets
Taking the wrong approach to business budgeting leads to more than just feelings of deprivation, restriction and stress. It causes long-term problems for your business.
Are you dealing with any of these right now?
Culture Issues
Imagine a family budget that provided half of the family with lavish chef-prepared meals, while the other half had to eat dollar-store TV dinners. Would that promote satisfaction, contentment, healthy relationships and the ultimate goal of family success?
That’s an extreme example, but something similar happens when budgets aren’t planned properly. And that’s because a budget influences everything that matters.
- A poorly planned budget leads to stress, cultural instability, unintended incentives and employee retention issues (especially with the high-potential ones you want to keep).
- A well-planned budget anchored to your company’s clear vision promotes a healthy and safe environment that feeds a culture of creativity, freedom, innovation and profits!
Burning Through Resources
When your budget is reactionary, it’s very easy to throw money at the wrong things. You end up spending on whatever seems urgent, without thinking about how it fits into your long-term game plan.
The result? You drain financial resources that could be better used elsewhere.
Example: You invest in a shiny new marketing campaign. It’s high risk, but you’re feeling the pressure to quickly hit specific KPIs, so you do it. When you’re grasping at straws, reacting on the fly and reaching for quick wins, you never have the time, effort and money needed for the initiative to be successful. If it were that easy, you’d already be doing it and everyone would be doing it. In the end, the campaign isn’t profitable and you’ve just burned through valuable resources. For many businesses this is a continuous cycle.
Poor business budgeting is like trying to fill up a bucket with a big hole in the side. You’re going to burn through a lot of resources to try and keep it full. And that’s not how CMOs drive ecommerce profit.
Limited Long-Term Growth
Every dollar you spend reacting to short-term needs is a dollar you’re not investing in the future. When you neglect critical areas like infrastructure, R&D and team growth, or even just right-time, right-cost campaign execution, you’re limiting your long-term potential. And that’s where real growth happens.
Stop and Think: What areas have you neglected because you’ve been too focused on short-term gains? What’s falling behind in your budget?
These missed opportunities may not show up immediately, but they’ll sneak up on you over time. And by the time you notice, it’ll be too late to pivot.
Key Takeaway: With no clear strategy, it’s easy to get caught up in reactive budgeting. You end up chasing short-term ROI outcomes and putting out fires without fueling long-term growth.
Instead, let’s see how you can leverage the power of precision business budgeting to fuel your ecommerce brand’s long-term growth. The next section has 5 action items to help ecommerce leaders do just that.
How to Develop Precision Business Budgeting
We’ve talked about the dangers of reactive budgeting. Here’s how to develop a budget that’s strategic, intentional and aligned with your long-term goals. This is precision business budgeting.
Strategy First. Budget Later.
If your budget isn’t tied directly to your business strategy, you’re just throwing money at problems. To avoid this, you first need to be crystal clear on your long-term vision.
Where do you want your business to be in the next 3 to 5 years?
Every dollar you spend should serve that vision and not just patch up immediate needs. This means budgeting across all critical areas of your business — not just the ones that feel urgent right now.
What It Means for You:
- Start with your long-term vision.
- Create a strategy. Map out what success looks like over the next few years.
- Create long-term goals that support your strategy.
- See our article with detailed steps on how to create that plan.
- Make sure your budget reflects those goals. Using frameworks like the Balanced Scorecard or 4+2 helps ensure you’re covering all the bases — financial health, customer satisfaction, internal processes and future growth.
Get Some Clarity: Get out a napkin and in one sentence, write down where you want your brand to be in 3-5 years. Then write down the top 5 areas you need to invest in to make that vision a reality. Does your current spending align with them?
Once you’ve got clarity on your strategy, the next step is easier.
Budget for What You’ll Build
Instead of only budgeting for what you’ll immediately get (chasing short-term ROI), budget for what you’ll build. Think about the resources, assets and capabilities you need to grow long-term.
I.e. A house flipper doesn’t try to calculate the ROI on every single fixture they install. They don’t think: “This $319 bathroom faucet increases the value of the home by $500 so it’s got an ROI of 57%.” You can’t do that for every dollar you spend. But if a luxurious master bath makes it easier to sell the home for a premium, you know it’s worth budgeting to spend more on the right fixtures like a pricey faucet.
What It Means for You: Stop obsessing over short-term ROI and start thinking about the effort it takes to get there. Building a scalable ecommerce business requires investment in areas like product development, tech, automation and customer loyalty programs. These things don’t show immediate results, but they create long-term value.
Try This: Think about your last budget meeting. Was it focused on chasing numbers or strengthening your foundation? Ask a team member. What do they say?
Detailed Plans
Budgeting without a detailed plan is like starting a road trip with no planned route. You’ve already got your destination (the strategy). Now you need a clear route to get where you’re going. This means having detailed scopes for every initiative you plan to fund.
What It Means for You:
- Before you start getting estimates for projects, make sure you have a clear scope. What’s the actual goal of the initiative? What resources are needed? Under-detailing these scopes is a recipe for wasted money.
- Don’t let agencies dictate the scope of initiatives. That’s like going to buy a car and then asking a car dealer what you need and how much you should spend. Don’t let them dictate the terms. You shouldn’t be in a position where you have to ask a 3rd party how to budget your resources.
- Find someone on your team who understands how to scope projects accurately. If you don’t have that person, consider hiring a fractional CMO or someone with the right expertise.
Stop and Think: Think about one recent initiative. Answer these 4 questions:
- Who dictated the scope?
- How did final spending compare to the initial plan?
- Did the initiative ultimately work to support our long-term strategy?
- How would you plan differently next time?
But what if after determining your vision and creating a plan to get there, you just don’t seem to have the resources to allocate where you need them?
That’s where gold and tearaway plastic come into play.
Balance Gold vs. Tearaway Plastic
Why aren’t common candy wrappers made from gold foil? Just imagine how posh you’d feel pulling the gold wrapper off a Snickers bar! They aren’t covered in gold because they simply don’t need to be. For Snickers’ intents and purposes, tearaway, disposable plastic is good enough.
The same is true with your business.
Not everything in your business needs to be top-tier, gold-wrapped, top 1% quality. Some things just need to be good enough. Sometimes you just need tearaway plastic. You’ve got to know where to invest in “gold” and where you can get away with “tear-away plastic.” Know where to splurge and where to save.
What It Means for You:
- Gold: These are initiatives, products, agencies, prominent parts of your business, etc. that directly contribute to the success of your long-term strategy. If you don’t get the best results from these, your long-term strategy is in jeopardy.
- Tear-away Plastic: These are initiatives, products, agencies, less prominent parts of your business, etc. that don’t move the needle. Some may be necessary parts of your business. Some you could eliminate completely. The point is, you don’t need to be competitively excellent here.
- Your largest sales funnel’s main landing page = GOLD. Why? Its success directly impacts CX, conversions and the results of your marketing.
- Your privacy policy page = TEAR-AWAY PLASTIC. Why? It’s necessary, and needs to be accessible and legally compliant. But it doesn’t need a fancy design, creative writing, split testing to see which version gets more customers to read it, etc.
- Think of Paretto’s Principle. Tear-away plastic in your business is where you can spend 20% to get 80% of the results and it doesn’t negatively impact long-term success. Gold is where you need to spend 100% to get 100% of the results or else your long-term success will be affected.
Do This: Just like you sometimes reassess your personal budget to eliminate unnecessary spending (like the 17 different streaming subscriptions we always forget to cancel), reassess where your business is allocating resources.
- Make a list of 10 major areas where you spend most of your money.
- Divide them up into GOLD and TEAR-AWAY PLASTIC categories. We know there are some that could go in the middle, but for clarity, just stick to two categories.
- Look at the resources you currently allocate to each of them.
- Ask yourself…where should I invest more in gold and less in tear-away plastic?
Important! Those last 5 steps won’t mean much if you don’t do the next one.
Communicate About the Budget
The best budgets are built collaboratively, with input from key stakeholders across your organization. So involve your team in the process — they may offer insights you hadn’t considered.
What It Means for You:
- Care enough to ask for feedback and ideas. It doesn’t cost you anything except a little time. And know that you can ignore it if needed.
- Go up the chain and talk to senior leaders.
- Go down the chain and talk with everyone from your team to your mom. Sometimes the best ideas come from places you’d least expect. Take a page out of Toyota’s playbook and their Creative Idea Suggestion System.
- Bringing people into the discussion also creates accountability and makes it more likely your team will support the budget strategy you create. This helps them view the budget less as restrictions placed on them by senior management and more as a collaborative tool for team success.
Do This Now: Get out a napkin and write down the names of 5 people — 1 from up the chain and 4 from down the chain (don’t forget your mom). Schedule times next week to get their feedback and ideas on the budget.
Leverage Your Budgets to Meet Your Goals
“Budget” doesn’t have to be a dirty word. Do the following to start implementing precision business budgeting so you can use it as a tool to fuel future growth.
Key Takeaways:
- Budget precision starts with a clear strategy
- You can’t create a budget without understanding key initiatives and their scope
- Budget less for immediate outcomes and more for what you build
- Spend more on gold and less on plastic
- Go up the chain and down the chain to get budget feedback and ideas
Action Item for You: Here’s a checklist of questions to consider this coming week:
- What is our 3-5 year vision?
- What are the 5 most important things to invest in to make that vision a reality?
- What were my last 3 budget meetings about…chasing outcomes or building foundations?
- Where should I invest more in gold and less in tearaway plastic?
- Have I scheduled time to get budget feedback and ideas from 5 people?
- What does mom have to say about this?
