If you’ve decided to launch an online advertising campaign, congratulations! You’ll be joining the hordes of other businesses who spend over $40 billion annually. And if you’re like most advertisers, you’re hoping to get a positive (and hopefully very large) ROI on that spend.
Of course, before you start advertising—whether pay per click (PPC) or display advertising—you’ll need to know how much you’re going to spend. And as it turns out, there’s no one-size-fits-all solution to determining your budget.
There are, however, at least three major strategies that companies use to more effectively determine their online advertising budgets, both online and offline:
- Percentage of Revenue
- Competitor Spend
- Market Objectives
PERCENTAGE OF REVENUE
One of the most common methods to determine a starting advertising budget (or more broadly, marketing budget) is to take a fixed percentage of your previous year’s revenue or this year’s expected revenue. As the performance of the company changes, the advertising budget can scale accordingly.
- Advantages: It creates a reliable, and repeatable method of allocating budget that increases and decreases ad dollars along with company performance. And if you’re carefully attributing your ad metrics to sales performance, then any relative percentage shift can also help you determine your advertising elasticity (advertising’s comparative effect on sales).
- Disadvantages: It ignores the possibility that you are under- or overspending based on your market goals. Either side of this method could have opportunity costs if there are better budgeting decisions available.
[/blog_quote]For instance, small companies and startups might attribute a larger portion (20% or more) to advertising because they re in growth phase and less concerned about short-term profit. Many mid-sized to large companies spend 5-10% of their revenue, and are characterized by sophisticated and diverse advertising programs that target various marketing goals.
The largest companies, however, may spend as little as 2-5% of revenue. This is mainly due to the diminishing returns on ad spend; advertising economies of scale; overlapping revenue attribution from other activities; and the brand awareness they already have (whereas smaller companies often have to spend more to build brand awareness).
In principle, matching your best and closest competitors’ ad budget can be a solid reference point. This is especially true when you’ve already attributed advertising to real campaign ROI—and when you want to increase your market share vs. those competitors.
- Advantages: You can predict how much you’ll need to spend to gain the brand awareness and online traffic/conversion metrics to be competitive in the marketplace.
- Disadvantages: It can be very difficult to get an accurate estimate of what your competitors are spending. It also doesn’t taken into account whether their ad spend (and more importantly, their ad strategy) is actually optimized and effective.
When it comes to estimating your competitors’ online ad spend, there are services like Spyfu and iSpionage, which can help you scout their daily PPC traffic, average search ad positions, keywords they’re targeting, and how many other advertisers are competing for those ad placements.
There’s a vast array of other evaluation tools that can help you estimate your competitors’ daily ad spend. However, be careful not to put much stock into one data point: check not one, but all of your closest competitors’ budgets.[blog_quote]Use these figures as a baseline for your daily ad spend, scaling slightly upward or downward depending on your business’s place and share in the market.[/blog_quote]Consider not just how “big” these competitors are, but how targeted their audience is compared to yours. If they’re targeting users worldwide with more general interests, but your brand is only interested in U.S. markets in niche categories, you might want to adjust your budget accordingly.
What are you trying to accomplish with your online ad campaign? Sure, we all want to drive traffic and increase conversions. But do you know realistically how much you can? What about these other goals?
- Earn a higher percentage of market share.
- Promote awareness of a new brand, service, or product.
- Drive free, helpful content during complex buyer cycles.
- Influence repeat customer purchases (and increase Customer Lifetime Value).
When it comes to ad budgeting decisions, it can be helpful to do a few quick calculations based on your industry knowledge and experience. For instance, let’s say you’re an established brand and you know the following information about your target audience:
- Total Market Size = 100 Million Active Online Users
- Chance of Audience Member Seeing Ads = 25%
- % of Ad Viewers Who Click = 3%
- Average Cost Per Click = $0.50
- % of Ad Clickers Who Convert = 5%
- Customer Lifetime Value = $50
Based on this [rough and simplified] set of data, we can assume for the 100 million audience members you could target…
- 25 million users will see your ads;
- 750,000 users will click the ads;
- 37,500 users will convert;
- Those clicks will cost $375,000; and
- Your Cost Per Acquisition (CPA) will be $10.
- Your ROI on ad spend will be 5x.
So in this case, you might want to budget almost $400,000 to maximize ad performance online. This example is obviously simplified from a real-life scenario (i.e. does not incorporate various networks and channels). But it does well to illustrate how you can use company- and industry-specific data to estimate your online advertising budget and campaign performance.
Finally, like most online advertising strategies, your job doesn’t end when you establish and optimize your first budget. It’s important to assess at least quarterly whether the budget was too high or low, and whether it was allocated properly cross the available online advertising channels.
It’s crucial to keep tabs on relative advertising performance year after year as your company grows, particularly in regards to diminishing ad returns. As you acquire more customers, more people will become aware of your brand (earning more authority and recall) and you’ll hopefully develop better advertising scale economies. In these cases, your total budget may increase, as long as your marginal advertising cost of gaining customers is below your marginal revenue. But your percentage-of-revenue ratio for your ad budget may actually need to decrease.
Since 2001, Advertise.com has offered competitive online advertiser and publisher solutions to companies around the globe. Our mission is to help advertisers achieve their best ROI with high-quality, cost-effective ad units, as well as provide our publishers with monetization tools that yield the highest revenues. Contact us to learn more or get started with your advertising campaigns.