How To Create A Realistic Budget For Digital Advertising

How To Create A Realistic Budget For Digital Advertising

One question we receive frequently at JB Media is how much should one spend on a digital marketing campaign. Within this post, we will dive into the many factors that influence this key decision, and, ultimately, help you move forward with a successful plan.

Note: This is one of those topics that is somewhat difficult to do without having a specific business in mind. Here, we shall 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 are the owner of the company or if you’re on the marketing team, before you can create a marketing budget.

  • What percent of your budget can you spend on marketing?
  • 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 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 spend zero to forty percent of their revenue on marketing. In very competitive and high growth industries, especially venture funded businesses that are not as concerned about profitability, it can be as high as forty percent. Some businesses spend nothing on marketing. 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 dollars revenue with 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 their products and their strong brand retention.

The probability of selling to an existing customer is greater than fifty percent while few businesses can convert more than ten percent of new visitors to customers.

The higher your customer lifetime value, the more you can afford to spend on advertising. 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 to 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 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?

In order to create a budget, you need to understand which tools are in play for your business.

  • Which platforms make the most sense?
  • What role does digital play in your overall mix?
  • 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. Ideally, the CPA is 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)

Traffic costs are going up. Facebook ad costs are up 150-175% in the last 2 years. Maintaining your CPA will be hard, so you must get better at other strategies 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 CPCs.

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 of these platforms, the cost per click averages out to be $.50 to $1.50. With this, 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 about doing one to two platforms really well versus trying to diversify. The creative costs, the data analysis costs, and the management costs go up if you spread yourself thin. It’s okay to test new ones from time to time, but don’t feel an obligation to stay with it if you don’t feel like it is driving a strong return.

Budget Breakdown

What percentage of a budget goes to digital? We see 25-100% of 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 choose the right tools based on your customers and any new insights you might have had.

Each platform has their own strengths and weaknesses. There is a difference in quality of people searching for something specific on Google versus someone just browsing Facebook. Remarketing, Google AdWords, and Pinterest are great avenues of 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 business services and B2B products.

In summary, 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 towards a budget that fits your intention for your business’s future.

Happy Budgeting!

Posted in: ONLINE ADVERTISING, SKILLS, WEBINAR
David Gwaltney Written By:
David Gwaltney, Online Advertising Specialist at JB Media Group.