Practical Ad Spend For Your Business: Are Your Budgets Realistic?
When it comes to ad spend, marketing budgets often vary in amount and allocation. However, it's helpful to know the importance of experimentation to determine the most realistic budget for you and your goals. No business is exactly the same, so you want to cater to your own needs and expectations for marketing.
Although, that never means you should hit the pause button on your ad spend. Of course, you have to begin somewhere — and there's no better marketing budget breakdown than the basics that will follow.
Marketing Budget Fundamentals
First and foremost, all businesses are different, with various needs and marketing goals. What works for one marketing team may not work for the next, so you must always be considering your business's circumstances when determining a realistic budget.
With that said, each marketing team can brainstorm the following questions to understand how to allocate funds/decide where to put marketing dollars first:
- What percent of your budget can you spend on marketing?
- What is your funnel/conversion process?
- How do you convert traffic into leads/sales?
- What is your lead to customer conversion rate?
- What is your customer lifetime value (CLV)?
When planning a budget, it's also essential to evaluate the worth of visitors/traffic, leads, and repeat/current customers to your business. This way, you can ensure you're not hindering your goals. With a better understanding of your goals and needs, you can create better marketing budgets.
Allocate a Percentage of Total Revenue to Marketing
Marketing is an essential component of a growing business, and when your business advances, your marketing needs to as well. For this reason, it's important to allocate a percentage of total revenue to marketing — instead of a set budget that never changes.
But how much? On average, companies spend up to 40% of their revenue on marketing. More specifically, 3% to 20% of funds are often put back into marketing. Businesses under five million in revenue with a 10% profit margin typically spend an average of 8% to 10%.
These numbers may seem daunting at first look, but remember: marketing drives revenue! The more marketing you do (as long as you're executing it correctly), the more connected you will be with your target audience. The more connected you are with your audience, the more revenue that comes rolling in as you acquire loyal customers, new customers, and free promotions like social and word-of-mouth referrals.
The Cost of Each Stage of Your Marketing Funnel
The simplest way to see how your business makes money is to think of the buyers' journey/ sales funnels. It's important to know what traffic costs, what it costs to acquire a customer, and what the average customer will spend to plan a marketing budget. This way, you can determine the right mix of ad spend versus return-on-investment (ROI).
The Cost of a Visitor
You must know your cost per acquisition (CPA) for marketing budgets, the initial cost marketers spend to acquire a new customer. This is important because CPA can show you how much your advertising costs when it successfully converts visitors. Without it, you risk the chance that you're overspending on customer acquisition.
Cost Per Acquisition = total advertising spend divided by the number of acquisitions
For budgeting and revenue reasons, you'll want your CPAs to be less than customer lifetime value (CLV), so consider where your audience is and what platforms make the most fiscal sense when targeting consumers before deciding where to market your brand.
From there, HubSpot suggests optimizing your CPA costs by:
- Piquing your audience's curiosity
- Selling a feeling
- Designing a simple, convincing landing page
- Pursuing conversions over clicks
The Cost of a Lead
You'll also want to get comfortable with cost per lead (CPL), an online pricing model that measures the cost-effectiveness of your campaign in terms of generating leads.
It is calculated with the following formula:
Cost Per Lead = total marketing spend divided by new leads
For example, if the client has a CPL of $200 and a goal conversion rate of 5%, you can back into what click-through rate (CTR) you need to succeed. This varies across platforms (display ads, social media platforms, AdWords) and industries, but you can use cost-per-click (CPC) to know how much it costs to gain a lead.
To budget well and get the most out of your paid advertising, determine which platforms will bring you the highest conversion rates for the most practical price. One or two digital advertising platforms can be enough for small businesses because creative, data analysis and management costs can get high if you're using too many platforms.
What's Your Customer Lifetime Value (CLV)?
CLV is the average total revenue from a customer throughout your relationship with the consumer. It is vital to know and understand because it determines how valuable that customer is to your bottom line. Therefore, how much advertising should be allocated to keeping your relationship strong with that customer.
CLV is calculated with this formula:
- Customer Lifetime Value = customer value multiplied by average customer lifespan
- Customer Value = average purchase value multiplied by the average number of purchases
CLV can vary by company size and industry. When it comes down to it, existing customers are much more likely to continue spending money with you, and they cost less than acquiring new customers. So, if your customers have a high CLV, you can spend more on marketing. For most companies, 20% is a reasonable budget. For example, if your CLV is $10k, you can spend $2k on new customer acquisition.
Partner With a Digital Agency to Get The ROI You Deserve
Innovative marketing teams know the cost of attracting traffic, gaining leads, and maintaining repeat customers. Marketing drives revenue, and with smarter marketing budgeting, revenues are higher.
If you aren't getting the ROI you should be, partnering with a digital agency can help provide better advertising solutions. There's no reason your business shouldn't be meeting its primary goals — with an expert digital agency, you can rest assured that you're getting the most out of your digital marketing budget.
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