One question we receive frequently at JB Media is how much you should spend on a digital marketing campaign. Below, we dive into the many factors that influence this key decision and, ultimately, help you move forward with a successful plan.
Note: Budget allocation is a topic that is somewhat difficult to explain without having a specific business in mind. In this post, we will speak in averages, but know that these numbers may vary from business to business.
Keys To Budgeting
These are some questions you should ask—whether you’re the owner of a company or on the marketing team—before you can create a marketing budget that works for you.
- What percent of your budget can you spend on marketing (social media ad spend, content marketing, search engine optimization (SEO), etc.)?
- What is your customer lifetime value (CLV)?
- How do you convert cold traffic into customers? What is your funnel/conversion process?
- What is your conversion rate from traffic to leads?
- What is your conversion rate from a lead to a customer?
You must know specific metrics, such as what a visitor is worth, what a lead is worth, and what the lifetime value of a customer is for your business, before you can build a marketing budget.
Marketing Budget as a Percentage of Revenue
Marketing drives revenue. In the average range, companies have a marketing spend of 0% – 40% of their company revenue. In very competitive and high-growth industries, especially venture-funded businesses that are not as concerned about profitability, it can be as high as 40%. Some businesses spend nothing on their digital marketing strategy. They have a built-in client base or they have a really great location and there is no need for marketing.
The more realistic curve, though, is between 3% – 20%. The average for companies under $5 million in revenue with a 10% profit margin is 8% – 10%. For example, a company that is making $800,000 in revenue typically spends between $30,000 – $100,000. This is primarily on advertising and marketing expenses and does not include the salary of the marketing director.
Lifetime Customer Value
CLV is the average total lifetime revenue from a customer. Every business will have a range, and it may take a couple of years to get a clear expectation of what that might be. For instance, Apple’s CLV is $8,000 based on the cost of its products and its strong brand awareness and retention.
The probability of selling to an existing customer is greater than 50% while few businesses can convert more than 10% of first-time visitors to customers.
The higher your customer lifetime value, the more you can afford advertising spending. If your customer spends close to $10,000, you could afford to spend up to $2,000 on advertising to get a new customer; however, if they only spend $100 in the lifetime of their customer journey, you might only be able to spend $20. For those smaller ticket items without a high repeat customer base, that can make it extremely difficult to market at such a low rate.
Ways to Convert Traffic
You must have a well-defined process for converting cold traffic from initial awareness through to the purchase process.
Some key methods for doing this are:
- Capturing emails and utilizing email marketing
- Producing webinars that are both educational and strategically sales focused
- Adding clear calls to action for lead capture
- Remarketing, which is advertising to previous visitors of your site
Once you have your lead capture marketing plan in place, continue to refine, test, and improve your strategies. It’s always easier and less expensive to double your conversions than it is to double your traffic.
Now that you know your CLV and have developed proven methods of converting traffic to leads, you are ready to create a marketing budget.
Where Are Your Customers?
To create a budget, you need to understand which tools are in play for your business.
- Which marketing channels make the most sense?
- What role does digital play in your overall mix of marketing activities?
- What is a visitor worth?
- What is the cost per acquisition (CPA)?
CPA is the cost of bringing a visitor to the site divided by the conversion rate. For example:
- $1 for a qualified visitor divided by 2%
- Conversion rate = $50 CPA
CPA must be less than the CLV to be the most cost-effective. Ideally, the CPA should be less than the initial purchase to generate a cash flow-positive business that does not require investment or debt to acquire customers. If you are paying equal to the purchase price, you are going to lose money because there are other expenses associated with your business. Sometimes though, you need to pay more for the first purchase because you know over time they will buy more from you. This holds especially true for companies with a subscription model or businesses with a high retention rate.
Costs of Traffic: Cost Per Click (CPC)
When it comes to social media marketing, traffic costs are going up. The average price per Facebook ad increased by 24% in 2021. Maintaining your CPA will be hard, which is why it’s important to focus on other marketing goals such as increasing your conversion rate.
One thing you can’t change is how much a click will cost. Depending on your industry, these numbers vary. Facebook is more consistent with CPC.
AdWords: $0.50-$10+ CPC / $1-$2 average
Facebook: $0.20-$3 CPC / $.60-$1.50 avg
Display Ads: $.10-$2 CPC / $0.40-$0.70 avg
Pinterest: $.15-$2 CPC
Twitter: $2-$4 CPC
Remarketing: $.50-$2 CPC
Across all these platforms, the cost per click averages out to be $.50 to $1.50. Once you know what a lead is worth, you will need to determine if you can get a high enough conversion rate from these sources at the right price.
Small businesses need to be very selective with their digital advertising. It’s all about using one to two platforms extremely well versus trying to diversify your marketing efforts across too many channels. The creative costs, the data analysis costs, and the management costs go up if you spread yourself thin. It’s OK to test new digital channels from time to time, but don’t feel an obligation to stay if you don’t feel like your target audience is engaging on that platform.
Marketing Strategy Budget Breakdown
What percentage of a budget goes to online marketing? We see 25% – 100% of the total budget at our agency—50% is the average. Once you have determined what percentage of your marketing budget is going towards digital, you will want to choose the right tools based on your customers and any new insights or market research you might have.
Each platform has its own strengths and weaknesses. There is a difference in the quality of people searching for something specific on Google versus someone just browsing Facebook. Remarketing, Google AdWords (Google’s pay-per-click (PPC) advertising solution), and Pinterest are great avenues for people looking for specific items. Adwords is perfect for search intent. Facebook, Pinterest, and Instagram perform well for consumer products. Finally, LinkedIn, where clicks are more costly, is right for ad campaigns targeting business services and B2B products.
There are multiple factors that play into establishing a strong digital marketing budget. Depending on your business’s intention of profitability, sustainability, or aggressive growth, you will need to know your revenue, risk comfort level, CLV, CPA, and where your audience is. From here, you can begin to make smart choices toward a budget that fits your intention for your business’s future.
Happy budget planning!