How Big Should Your Paid Advertising Budget PPC Be?
An overview for those just getting started, and a reminder for those who have been on-line for a while.
With content marketing and social media use on the rise, it can be especially tricky to determine where your paid advertising budget should be invested. You want to make sure to spend enough to grow your business, but not so much that it ends up putting you in a financial hole.
We’re here to help. We’ll walk you through the process of determining the proper advertising budget for your business based on your sales and profit margins. The resulting number might end up surprising you.
Budget Calculation Basics
The first thing you need to do is figure out your total paid advertising budget. A lot of companies underspend or overspend on advertising. They may also be making unwise choices in terms of where to spend their budget, but that’s a separate topic.
The key to determining the amount of your budget is to factor your profit margins and mark-up into the calculation. Here’s a formula you can use to figure out your minimum and maximum allowable advertising budget.
Calculate 10% and 12% of your gross annual sales if you’re in a high margin business.. if you’re a low margin business but high volumes (like a wholesaler) then you will need to work with 1% to 2% of your gross annual sales. A company with a million pounds in sales would start with figures of £100,000 and £120,000, a wholesaler would be £10k and £20k
These numbers can help you form the framework of your budget. You may decide that you want to stick to the low end of the budget, especially if it’s more than you’ve been spending. On the other hand, if you’ve been spending more than you should, it may be a challenge just to bring your spending down to the high end.
Return on Investment vs. Customer Acquisition Cost
It’s not enough just to set the proper amount for your paid advertising budget. You also need to crunch the number to ensure that the money you spend is getting the results you need.
Many small business owners focus on ROI (return on investment) as the number that determines whether an advertising campaign is a success. They figure if they end up making more than they spend, then they’re doing just fine.
We like to recommend an additional strategy. Customer Acquisition Cost, or CAC, is an important number to keep in mind as you finalise your marketing budget.
You can determine the cost of acquiring a new customer by looking at your website’s conversion rate. Let’s use a simple example to illustrate the point.
Imagine a company that spends £1 for each visitor to its website. They might be paying for pay-per-click ads on Google, Facebook, or even traditional offline advertising such as direct mail.
Once visitors land on their site, they’re converting 2% of those visitors to paying customers(2% conversion is a very decent performance these days). That means that for every 100 customers who visit their site, they’re making a sale to two.
In this example, the CAC is £50. They spend £1 for each of the 100 visitors to the website and convert two to customers. You can see why looking solely at the PPC rate is a mistake. This company is spending much, much more on CAC as they are on PPC. That’s a big difference.
Look at your current advertising budget and figure out what you’re actually spending to acquire a new customer, than just a website victor, or lead/opt-in. That can help you going forward.
Lifetime Customer Value
The last statistic you need to know to make the most of your advertising budget is the lifetime value of a customer.
Why does this number matter? Simply put, you need to make sure that the average customer’s lifetime value (LTV) is greater than the CAC. If it isn’t, you’re in big trouble.
Let’s continue with the example we provided in the previous section. If a company has a CAC of £50, they would need to have an LTV higher than that to justify the money they are spending on their advertising. This is a figure many forget to add in, and just look at stats on an annual basis… so with this LTV stat in mind, you can often outspend your competitors by thinking more longer term customer value to your business.
Regrouping and Strategising
After you’ve crunched the numbers, the final step is to look at your advertising budget and determine what you need to do differently… how can you v=bet spend your advertising £’s to maximise your return over the lifetime of your customer.
If you’re using Google AdWords, you should keep in mind that the top three paid options on the search results page get approximately 41% of the clicks. Instead of trying to compete for a top keyword, focus your attention on long-tail keywords that are less competitive, and hence expensive.
You may also want to consider moving away from search engine advertising and reallocating your budget to social media advertising, remarketing and other, more cost-effective options. And don’t forget to test direct mail as it can still work well when done well.
The key to making the most of your advertising budget is to make the most of each pound you spend. Crunching the numbers ensures you eliminate waste and maximise your profits.
Paid advertising is extremely effective when it’s done right.
Connect with us today to learn more about how to get the most out of your sales and marketing efforts.