When you’re thinking about starting to use any form of paid advertising in your business, something that will inevitably come up is budget: how much money should I allocate for this?
I hate getting asked this question because it really is a ‘how long is a piece of string?’ question. Naturally, if you’re selling fidget spinners that cost £15, you’re advertising budget will be very different to a company selling consultancy projects that run into the tens of thousands.
Fortunately, there is a fairly simple way to get to the bottom of this rather crucial, but annoying question. It does involve a bit of maths, but I think you should be able to follow along. If you do have any questions about any of this, shoot me an email and I’ll be happy to help where I can.
Before we can start to calculate your expected advertising spend, there are a few numbers that you’ll need to know. Otherwise, we’re talking theory about someone else’s business – and that isn’t any use to anyone.
Please don’t skip ahead and throw numbers into a spreadsheet. Personally, I think it’s really important that you’ve got an understanding about how you arrive at these numbers and spreadsheets, while useful, don’t really re-enforce this at all…
I’ve split this out into e-commerce businesses and (creatively) none e-commerce businesses. If you sell stuff online, you’ll want to follow the steps in e-commerce, if you don’t; the other one.
Cost-per-click: A recent report by AdEspresso (https://adespresso.com/blog/facebook-ads-cost/) suggested that the average cost-per-click from Facebook advertising was $0.97. I recommend that you do a bit of digging online to see if you can find a number for your sector.
First of all, we need to know how many orders you are looking to get. To get this, you’ll need to divide your sales target by your average order value.
Let’s assume that my sales target is £10,000 and my average order value is £127. I would need 78.74 orders to hit my target.
Next, we’ll work out how many people we need in total. Take the number of orders you’re going to need and divide it by your conversion rate, then multiply by 100.
Let’s say my website converts at 5.5%. I would take 78.74 and divide this by 5.5 (which gives 14.32), then multiply this by 100 which gives my 1432. This is the total number of visitors you’d need.
Finally, take your average cost-per-click and multiply this by the total number of visitors. So I’d take 0.97 and multiply this by 1432 which would give £1389.04.
This model would predict (assuming all the numbers hold true) that you’d need to spend £1389.04 to generate £10,000 in sales.
This would be a 619.9% return on investment.
If your company doesn’t sell online, it’s a little harder to predict what your advertising spend should be. However, it’s still possible.
Follow the same steps shown in step one of the e-commerce calculations. For none e-commerce customers, the average order value is normally much higher. You might be looking to make £10,000 but have an average order value of £1795.
Working on these numbers, you’d need 5.57 sales.
This is similar to the website e-commerce calculations, but in this example you’re going to be dividing your target number of sales by your internal close rate. Let’s say that I expect that 3 in 10 ‘sales leads’ convert to a sale. That would make my close rate 30%.
So I’d take my 5.57 sales, divide this by 30 and then multiply by 100.
In this example (albeit with simple numbers), the answer is 18.6.
So, you’d need to have 18.6 sales leads into your sales pipeline.
Next, you’ll need to look at your website conversion rate (i.e. how many people visiting your website get in touch). Naturally, this can’t be based on the number of people.
Just like in the non e-commerce example, take your website conversion rate and divide the number of leads you need, by this number.
Assuming my website conversion rate is 1.2%, I would take my 18.6 leads and divide this by 5 – which gives me 15.5. Multiplying this number by 100 will tell you how much traffic you’ll need to get your leads.
In this example, I’ll need 1550 website visitors.
Now all that is left to do is multiply the estimated cost-per-click by the number of visitors. So, assuming the cost-per-click is £0.97, we’d be estimating that you’d need to spend around £1503.50 on traffic to generate the leads you are looking for.
In this example, your advertising spend would give you a return on investment of 565.12%. Not too shabby!
Hopefully, this article has shed a little bit of light onto the question of how much should you spend on advertising. I make no promises, and this isn’t an exact science. The performance of your advertising is determined by hundreds of factors. This article is just here to give you a bit of guidance and help you on your way when planning your campaigns.
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