It’s the most popular question I get asked by clients when considering digital advertising for customer acquisition.
How much should we spend?
You could get started from as little as $5 a day. Will that move the needle if you’re selling a $500 product? Unlikely!
You can get estimates from Facebook and Google’s campaign planning tools. But these figures serve as a benchmark, at best.
Ad platforms present half the picture. There’s more to it. The real magic happens after the ad click.
I’ve also included a done-for-you FREE spreadsheet at the end of the article.
Here’s the 5 step process we use to calculate ad spend.
1. Benchmarks and Key Metrics
If you haven’t run ads before or have an active campaign that needs optimisation you’ll need to work out what good looks like.
I say good because you could very well outdo these benchmarks and have great campaign metrics.
Wordstream, an ad management solution, has a great report on ad metrics benchmarks by industry.
Key metrics you’re looking for on each ad platform are:
- CPM – Cost per thousand impressions – what does it cost to show your ad to a thousand people at least once. Remember, you’ll need more than one ad impression to get action from the reader.
- CPC – Cost per click – what does it cost for someone to click on your ad. In highly competitive industries like finance, retail and hospitality this can be quite high (all the more reason to work on what happens after the click).
- CTR – Click through rate – Of all the people who saw your ads, how many will actually take action
- CPA – Cost per acquisition – what does it cost to get someone to take the desired commercial action e.g. signing up for a mailing list, purchasing, booking an appointment etc.
Once you have these figures, make a note of them. Remember, these are industry averages. Your actual metrics will be different when you implement the ad campaign.
2. Map Your Sales Process
Answer this simple question – what happens after someone clicks on your ad and arrives on your website? What are you asking them to do?
Common sales-oriented actions businesses expect their visitors to take are:
- Make an appointment/booking
- Sign up for an email campaign (course, information, report etc)
- Purchase a product or service
- Sign up for product trial
If you’re transacting online the path to revenue from will have additional steps such as:
- Browse the detailed product page
- Add to cart
- Reach checkout
- Fill checkout form
- Complete checkout
For services businesses the sales process (simplified) looks like this:
- Book meeting to gauge client fit
- Submit proposal
- Handle objections
- Close the deal (won or lost)
Each of these steps is important. Only a certain percentage of prospects will move from one stage to the next. This is important because it will impact your ad strategy’s returns. More on this later.
3. Calculate Lifetime Value
For a new business, this can be tricky. But you should already have some retention goals in place so that you can work this out.
If your business has been around for some time then this is how you would calculate the average lifetime value (LTV) of a customer.
(A) Avg. Customer LTV = Avg. customer value x Avg. customer lifespan
(B) Avg. customer value = Revenue per transactions / Transaction frequency
(C) Avg. customer lifespan = Total customer lifespan / No. of customers
4. Figure out Your Costs
Whether you’re running ad campaigns in-house or through an external agency there will be a cost associated with running an ad campaign.
Yeah, no free lunch here, I’m afraid.
These costs include paying a specialist and using tools to run ads for you.
We’re not trying to build a detailed profit and loss statement so don’t worry about the cost of goods, fixed costs etc. This will get covered in the margin, in the next step.
5. What’s your margin?
Margin is simply the profit left over after all costs and revenue have been accounted for.
If you’re unsure, just ask your accountant or your finance team for help.
Of course, for a startup, with all the upfront investment, this will be negative for a time. So if you’re not making a profit yet, mark this as zero.
Everything you earn from making a sale through advertising will contribute to the bottom line. Consistent contribution to the bottom line will bring your startup out of the red.
Once you have all your metrics, benchmarks and numbers plug them into the model I’ve created for you. Make sure you create a copy for yourself or download it before editing. All I’ll ask for is your email address (to share other such methodologies, insights and tools)
This ad budget model is designed for our agency. But if you did step 2 right, you can create your own model easily.
If you get stuck, reach out to me here.