The start of a new year always brings new opportunities. And online advertising is not the exception.
We’re sure you learned a lot about your business in 2017, so the last thing you’d want to do is make the same mistakes. But it’s only too easy…
That’s why we think it’s essential to talk about an issue you mustn’t ignore: How to set your advertising budget to make sure you get the highest return on investment.
Why should you care about how much you allocate to your ads?
Well, because ads are an exceptional tool for increasing any business’ sales, in addition to creating brand recognition.
But this wasn’t the case until a few years ago. John Wanamaker (1838-1922) was an American entrepreneur who went down in history for the quote: “Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.”
Advertising, by default, used to involve a lot of unavoidable expenses. And while many campaigns were incredibly creative and innovative, they didn’t necessarily lead to more sales.
However, the Digital Age gave rise to advertising platforms that offer some very attractive models. Advertisers started to pay for results, like clicks, prospects’ details, and even closed sales (on e-commerce platforms).
That was when the marketers of the New Age started to see advertising as an investment, and not as an expense.
We also want you to invest in advertising so you can generate more customers. So, if preparing your budget has always been a problem for you, or you think trying out a new strategy would be a good idea, keep reading and you’ll definitely learn something valuable.
What To Consider When Planning Your Advertising Budget
Every year begins with new challenges and new technologies. That means we have to be ready for any changes that might occur and be ready to adapt to how consumers evolve.
Here are the main points you should consider before allocating your budget. They may also make you reconsider the adjustments you’ve already made this year…
1. Your target market
In order for the budget you assign to your ads to bring you the results you’re expecting, the calculation shouldn’t be random or hypothetical. It has to be a realistic amount that are designed around what you’re offering and who you’re offering it to.
So, let’s cut to the chase. This part of your budget will be directly connected to your market. Therefore, you need to know your market like the palm of your hand: its age range, gender, occupation, interests, limitations, difficulties, and even its favorite (digital) media.
Once you’ve clearly determined which niche market you want to reach and which media your target audience is on, it’s essential to choose the one that will guarantee you the highest return on investment. Make estimates and projections on the scope and conversions.
By the way, it’s worth clarifying that, despite the impact traditional advertising techniques still have today, the truth is that you can’t rely on only them.
The real problem with traditional techniques is not so much that they don’t offer results, but that they are tough to interpret, quantify and predict.
As we’ll mention later on, you never know exactly which one of your campaign strategies generated the most prospects or customers for you. So, calculating or estimating your ROI can become a very messy and complicated process.
2. Your company’s needs and priorities
The ideal budget for your ads will be unique; as unique as the product or service you offer. But that doesn’t mean you should ignore what the competition is doing.
Analyzing companies similar to yours can be very helpful, especially if you’re looking for a reference parameter on how much to allocate for each media, or find out how close you are to the industry average.
While there are companies that invest significantly more in advertising than the average, others can spend less and get even better results.
What does that depend on? It generally depends on the life stage of the product or service. If you’re about to launch your product or service, you’ll probably need to allocate a higher budget to create brand awareness and get attention.
On the other hand, if your product or service has been on the market for a while (at least 5 years) and the brand is well-known, a few awareness campaigns might be enough.
For example, Laurel Mintz, founder, and CEO of Elevate My Brand, recommends that new companies use 12 to 20% of their total revenue or total projected revenue on their marketing strategy; while more established companies should use between 6 and 12%.
But remember that advertising is only one part of your marketing strategy. You’ll also have to consider its other components.
3. The transition to digital media and devices
According to Forrester and eMarketer reports from just 2 years ago, digital marketing budgets never exceed 30% of the total marketing budget.
Today, it’s estimated to be around 40%, and this percentage will continue to increase in the coming years.
Digital media is no longer a joke; it’s vitally important for you to take into consideration when budgeting. In fact, these days, digital media is at the top of the list of the most relevant marketing channels and has a significant impact.
Remember: you must have a presence on the digital media your target market is on. Today, the average consumer spends over 8 hours a day on online devices, and more than half of these are on social networks.
According to Kissmetrics, the 5 most effective channels in 2017 were:
- Websites (63%)
- Email (52%)
- Social media (49%)
- Organic searches (31%)
- Paid searches (29%)
And shortly after paid searches came advertising on mobile devices, which has already surpassed traditional media like newspapers, television, and radio.
What is this telling us? That the path is perfectly clear: your No. 1 priority should be to focus on the digital world.
How Much To Invest In Online Advertising
According to Equities, you should set aside at least one-third of your total marketing budget to cover advertising. That means PPC campaigns, ads on social networks, campaigns to generate leads or conversions, campaigns to create sales, etc.
That doesn’t mean you should think of it as mandatory. At the end of the day, you’re the one who best knows your company’s objectives and needs. You can also analyze the media that worked best for you in the past and choose the one that gave you the best results.
That might mean you should re-invest more in the Facebook ads that lead to more sales for you, and less in the AdWords ads that didn’t, for example.
The Most Popular Social Media
According to an eMarketer report that projected the penetration of social networks from 2015 to 2020, there is strong evidence to suggest that the number of users will keep increasing, and ads on social media will only get more and more successful as time passes.
The most recommended social network to invest in is still Facebook, while Instagram follows in second place and will see strong growth in the coming years.
Twitter, Pinterest, and Tumblr are next in line, although their user percentages are much lower.
Despite the high impact of social networks, there is a digital channel that remains undefeated due to its scope and popularity: Google AdWords. This media was the preferred investment by companies and marketing experts in 2017 and is predicted to remain the champion for at least a few more years.
And if you want to save yourself have to try and predict which digital media will be most profitable for you, what about a specialized tool like Adext AI?
Adext AI is the first and only audience management as a service in the world, that uses the most advanced Machine Learning and Artificial Intelligence technologies to find the most profitable audience for any kind of online ad, and on average this Artificial Intelligence is increasing ads performance by 83% in just 10 days.
It also automates budget management and optimization across several demographic groups and multiple channels (such as Google, Facebook, and Instagram) to ensure it gets you more leads and sales, at the lowest costs per conversion, by applying up to 480 daily changes to every ad.
Oh! And the best part is that Adext will be FREE until it actually provides you with a superior conversion performance.
If you want to learn more about Adext AI, this article that explains exactly how this tool works will be perfect for you.
How To Calculate Your Online Advertising Budget
To work out what you should be spending on advertising, you must start by getting clear on what your sales revenue is because your advertising budget should be completely covered by what your sales generate.
There are several methods that can help you plan and design your budget. There are even calculators available to make the process easier for you (click here to see one).
These are some of the most popular methods…
a. The traditional method
This is definitely the simplest and most common method. It consists of setting aside a percentage of your projected annual sales revenue and assigning it to your ads.
For example, suppose you decided to invest 5% of your total budget on advertising and your projected total revenue for this year is $1,000,000 USD. That would mean you’d have to allocate $50,000 USD to invest in advertising. Simple, right?
If you’re not sure what percentage to allocate to your ads, you can always use the industry average as a starting point.
b. The sales unit method
This method is highly dependent on experience, but you can also use the industry averages to get an idea. This method involves knowing how much money it costs you to promote the sale of a product or service at a specific price.
For example, if it costs you $10 USD to advertise a product or service that has a retail price of $200 USD, you’d need to invest $2,000 USD to sell 200 units and generate an income of $40,000 USD.
c. The maximum permissible method
There’s not too much science behind this method, and its name tells you everything you need to know.
It’s usually a method applied by dismissal or intuition, where the maximum percentage allocated to advertising is everything the budget allows for. This method should be used when you either want to put everything toward advertising or because that amount is all that’s left of your budget.
It’s not highly recommended. It’s very unreliable and doesn’t have a solid foundation to support it, which can significantly affect the total revenue of a company, especially if it’s not well established.
d. The tasks and objectives method
This is a truly meticulous, but highly effective, method. It’s based on having a brilliant marketing plan with clear objectives.
This method involves making a list of priorities and putting them in order according to their importance. Once you’ve set your specific advertising goals, you should determine the activities you plan on doing to meet them, as well as the estimated price they’ll cost you.
If your company is relatively new and it’s already clear what these different activities may cost you, this method is definitely for you.
It’s Time To Create Your Advertising Budget!
Now that you already have your budget all set, it’s time to maximize your return on advertising spend (ROAS). The standard range tends to be from 5 to 1. This means that you should receive $100 USD for every $20 USD invested.
By calculating your ROAS, you’ll be helping yourself evaluate the performance or success of your campaigns. That way, you won’t ignore this critical indicator.
Lastly, we want to share a few reasons with you on why creating your advertising budget is so important:
- It’ll help you to avoid wasting money due to overspending or underspending.
- You’ll master the art of predicting your return on advertising spend.
- You’ll find out if you need more capital to take your brand to where you want it to be and meet your business goals.
- You’ll understand that advertising is not a cost, it’s an investment, and it might just be your most profitable one.
- You’ll have much better control over your budget, and you won’t be playing guessing games.
So, by now you shouldn’t have any doubts about the importance of strategically setting your advertising budget. We hope you’ve learned something useful in this article.
If you have any other recommendations or practices you use to set or adjust your budget, please share them with us. We’d love to hear about them!
Other related articles you may like:
- What Is ROI In Digital Marketing And How To Calculate It
- Essential KPIs For Digital Marketing Strategy Performance
- Why Machine Learning It’s Changing The Advertising Industry
How To Establish Your Advertising Budget For A Higher Return On Investment