Setting a digital marketing budget can be tough. This is because most businesses don’t establish a budget until they’re large enough to afford it. Once that happens, the advertising budget competes against other expenditures. You have to justify every dollar.
So how do you think through how much you should be spending and what the potential return should be?
I’ve had this discussion with clients many times. As a partner in an agency, I often have opinions about how much my clients should be spending. The reality is that most clients establish their budgets based solely on their own subjective perceptions of the value of marketing, often without much confidence in the answer.
Here are three simple ways to establish a budget based on data.
1. Cost Of Advertising
How much will it cost you to acquire a customer? Answering this simple question will provide high-level guidance on whether advertising will be an expensive or relatively cheap proposition. It can also give you an idea of how many customers you can expect based on what you’re spending. Now, most businesses won’t be able to answer this specific question without having spent quite a bit on advertising already.
My recommendation is to use the average cost per click (CPC) on Google search ads as a proxy for the cost of advertising. You can do this by using Google’s Keyword Planner to research the average CPC for your most targeted search keywords that are most likely to convert. For example, if you own a fertility clinic, your most targeted keywords might include “fertility clinic near me” or “best fertility doctor.”
A low CPC of a few dollars on these very targeted keywords means you can get more out of a small budget. However, a high CPC of $10-plus is an indication that you’re going to need to spend more to acquire a new customer.
2. Revenue Per Customer
This is my preferred way to look at advertising spending because it makes the conversation more about return on investment and your goals for customer acquisition. If your revenue per customer is low, say $100, then you’ll need to find low-cost ways to acquire customers. However, if your revenue per customer is high — in the thousands — then you can likely spend a bit more on customer acquisition and still be able to see a return on that investment.
My recommendation in this scenario is to establish a cost per acquisition (CPA) goal that allows you to still see a return. Running your first campaign will quickly let you know whether achieving that CPA goal is realistic, or whether you need to adjust. Remember, you’ll see different costs per acquisition for different channels, so it’s important to test different ways of marketing to prove out those costs.
Lastly, it’s important to know what your actual revenue per customer is. Ideally, you’ll want to know the lifetime revenue a customer represents — sometimes short-term revenue may be low, but recurring revenue can be a much larger opportunity.
3. Percentage Of Your Total Revenue
Finally, looking at your marketing budget as a percentage of your total revenue tells you how much you should be spending based on your size. If you’re a large company, you’re unlikely to move the needle with a very small budget. Take a look at the competitive benchmarks for other companies by industry.
According to Deloitte’s February CMO Survey, the budgets of 265 top marketers accounted for 8.6% of their companies’ revenues in February. This percentage varies based on industry, and such budgets often include both advertising spending as well as operational costs such as software and staff salaries. What I’ve consistently found is that most higher-growth companies spend closer to the average, and most lower-growth companies underspend on both advertising and internal resources.
Bonus Method: What You’re Able to Afford
Ultimately, your advertising budget comes down to what you can afford. The metrics above tell you what you should be spending, but it may not be feasible based on the current state of your business. If that’s the case, I suggest doing the following:
- Start with the goal of determining your true CPA. Once you have done so, you’ll get a clear picture of what kind of advertising budget you need, and you can plan for future investment.
- Acknowledge the reality of your budget, and set your expectations. Don’t expect massive growth if you know you’re not spending enough.
- Get creative. Anyone working in marketing knows that sometimes you catch lightning in a bottle. It’s only found through experimentation. You can find the exception to the rule — the dirt-cheap tactic in an expensive market. But you won’t find it if you’re not spending any money.
- Lastly, once you begin to see ROI, scale up your spending. See if it holds as you spend more. Think of your marketing as an investment in the growth of your business.