How Much Should You Spend On Advertising – If you clicked on this post hoping to read something like “If you spend $1,000 a month on digital advertising, you’ll hit your marketing goals with ease!” I’m sorry to disappoint. When it comes to ad spend, there simply isn’t a perfect answer for every business. I know, it sounds like a cop out, but I promise it’s true. Now, you might be thinking, so why am I reading this post anyway? While I can’t tell you how much money you should spend on digital ads this year, I can guide you through a framework to help you decide on the optimal ad spend. Finally, here’s what you should think about when deciding how much you should spend on digital advertising: How much investment is needed to reach my revenue goals? What percentage of my marketing budget can I realistically afford to spend? What is the lifetime value (LTV) of my average customer? How well am I converting website visitors into leads and leads into customers? How much money do I spend on each offer? By the end of this post, you’ll know how to use historical data to determine how much money you need to spend to reach your business goals and how to optimize your efforts to get the most out of every advertising dollar. Sounds good? Let’s get into the game. 1. How much investment is required to achieve income goals? So where do you start? Well, the main goal for most companies is to generate sustainable long-term revenue growth. That’s why when determining how much to invest in digital advertising, you should work backwards from your company’s revenue goals. Working backwards can help you determine how much revenue your digital ads are bringing in, which can inform your how much investment you need to achieve this goal. Here’s what it might look like: It all starts at the top with your business goal, which is most likely to increase revenue. You will have many departments working together to achieve this overall goal, including marketing, sales and customer service. By taking a look at the historical performance of your business, you can identify what percentage of revenue each department is capable of delivering. In marketing, you will have multiple goals that feed into your marketing responsibility, including paid, owned, and earned goals. You will launch a range of initiatives to support this business objective, including paid media campaigns. To understand this concept, let’s go through an example. Let’s say your business has a goal of increasing revenue by $100,000 this year. From historical performance, the business makes the marketing department responsible for 50% of this goal. Great – now, what initiatives will you launch to bring in that $50,000 in income? Well, digital ads will be just one of many tactics you launch, all of which will require investment. Based on the historical performance of your ad campaigns, you know that you have an average return on ad spend (ROAS) of $2.50. This means that for every advertising dollar you invest, you earn $2.50. If you think your other marketing campaigns on owned and earned channels can hit 75% of your overall marketing goal, that leaves you with 25% to go to ads, or $12,500. Divide that by your $2.50 return on ad spend, and you’ll find you need to invest $5,000 over the course of the year to reach your revenue goals. 2. What percentage of your marketing budget can you realistically afford to spend? Now, do you actually have $5,000 to spend on digital ads? If you do, then great – you can continue to support long-term revenue growth with your existing advertising strategy. But I wouldn’t be surprised if many of you simply don’t have the advertising dollars you need to make the impact you want. Or, maybe you’re new to digital advertising and don’t have historical ad spend and return on ad spend data to inform your decision. what do you do then It’s a difficult question to answer honestly, but you have to ask yourself, “How much money do I really have?” Take a look at your cash flow and profit to understand how much money is realistically available to invest in digital advertising. If you set a budget you can’t afford, your campaigns’ long-term success and sustainable growth is doomed from the start. That’s why it’s important to start with a budget you’re comfortable with and can commit to long-term. But don’t worry—even if you’re on a tight budget, that doesn’t mean you can’t use paid media as part of your larger marketing mix. Finally, before jumping straight into ads, you want to further optimize other business metrics to get the most out of every ad dollar. 3. What is the lifetime value (LTV) of your average customer? Lifetime value is a prediction of the profit attributable to the entire future relationship with a customer. Simply put, LTV tells you how much money you’ll make from a single customer over time. To calculate your LTV, take the average annual revenue your average customer brings you and multiply it by the average lifetime of a customer. For example, if your average customer pays you $500 per year and stays with your company for six years, we can say that the average lifetime value of a customer is $3,000. But let’s not forget how much it costs to serve a customer. If you consider that it costs you $50 to serve that customer each year, or $300 over the lifetime of that customer, you can say that the average lifetime value of your customers is $3,000 minus $300, or $2,700 . Now, the higher your lifetime value, the more money you can realistically spend to acquire a new customer. If you’re feeling short on advertising dollars, consider taking steps to increase your customer’s LTV. There are a lot of best practices for increasing customer lifetime value that I won’t go into in detail in this article. But to get started, think about things like your company’s subscription and pricing models. Launching marketing initiatives to move the needle on LTV will in turn make digital ads more successful and less expensive. 4. How well are you converting website visitors into leads and leads? Now that you have an average lifetime value for your customers, you can go back to see what your monthly advertising budget should be. We’ll walk through this example focused on the value of a form conversion, but you can apply the same approach to any conversion points you’re optimizing your ads for. You’ll want to consider two things to figure out your advertising budget: Average Conversion Rate: The rate at which visitors to your website convert to a form and become leads. Average lead-to-customer rate: The rate at which leads become paying customers. Let’s say you run an IT solutions company and want to advertise your upcoming webinar on network security. Analyze the performance of your landing pages for previous webinars and find that you have a 7% conversion rate and a 10% lead-to-customer rate. So if ten people sign up for your webinar, you can expect one person to become a paying customer. What are these numbers for your business? Are they smaller than you would like? If so, that means your advertising dollars aren’t being spent as efficiently as they could be. To increase your landing page conversion rate, we recommend testing calls to action and adding social verification. And to convert more leads into customers, you could use email automation to nurture your leads into making a purchase. There are many things you can do here, but for the purposes of this exercise, you should know that if you have low conversion rates, pouring more money into poorly performing ads is not the best use of your resources. 5. How much money are you spending on each offer? To get the most out of your ad spend, you want to bid less than your estimated profit. LTV, conversion rate, and customer rate can be used to determine what your maximum bid amount should be using this equation. Maximum Ad Spend = LTV x Conversion Rate x Lead-to-Customer Rate Let’s go back to our example webinar to see this in action. If you divide a new customer by your lead-to-customer rate, you’ll see that we need 10 webinar signups to get a new customer. Next, divide the number of webinar signups we need by the average conversion rate. Using our 7% webinar conversion rate, we find that you need about 143 clicks per ad to generate a new customer. If that customer is worth $2,700 to you, we can start calculating how much you should be spending per click on your ads. If we were to ignore all other acquisition costs
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