Calculating Perfect Ad Budget To Match Your Business GoalsOct 12, 2016 by Lina Vashurina,
So you’ve decided to start an ad campaign for your
Congratulations! For all benefits of blogging and social media, running an ad campaign is still the fastest way to drive quality traffic to your store.
The only problem now is figuring out how much you can spend on ads without ruining your budget.
Between dealing with varying ad rates and models, developing ad creatives and planning the campaign over several months, you’ll have your hands full.
To help you out, we’ll show you a proven method to figure out how much to spend on ads for your
Ready? Let’s dive in!
What you need to calculate your ad budget
Figuring out how much to spend on ads is a matter of balance. You don’t want to waste money by overspending, nor do you want to be ineffective by underspending. There is a
Before we start, there are a few key terms you need to understand:
Markup is the difference between the cost of a product and its selling price (gross profit above cost). This is usually expressed as a percentage.
For example, if you sell a product for $150 when it only cost you $100, your markup is 50%. You’ll want this figure for all your products individually and your store as a whole.
Margin is your gross profit expressed as a percentage of selling price.
In the above example, your profit would be $50. Thus, your total margin would be 33.3% ($50/$150).
Cost of occupancy is a cost associated with keeping your
e-cCommercestore up and running (such as web hosting, inventory management, and shipping and handling).
These costs are usually static and predictable.
You need these metrics before you can start calculating your ad budget. In a separate spreadsheet, make note of these metrics.
You might have something like this:
|Margin||Markup||Cost of occupancy|
|Average for Store||43.39%||76%||$30.000|
Once you have this data, you can start calculating your ad budget.
Calculating your ad budget
How much you can spend on ads will depend on three things:
- Niche: Stores in certain niches can get away with spending less on ads because of higher margins or stronger word of mouth/social media reach. This is particularly true for fashion or highly
- Business stage: You’ll have to spend extra on ads in the early stages of your business to establish your brand. Late stage businesses can get away with spending as little as 3% of their annual revenue on advertising.
- Margins: Advertising budgets are usually a function of your margin. The higher the margin, the more money you’ll have to spend on ads.
Generally speaking, most small businesses spend between 5 and 8 percent of their annual revenue on marketing. For businesses with less than $5M in revenue, the US SBA recommends spending
Understand that this also includes brand development costs, including spending on websites, blogs, and social media. Usually, you’ll have no more than 3 to 5 percent of your annual revenue to spend on advertising.
With this in mind, let’s look at a step by step process for calculating your ad budget.
Read also: Publicity on a Budget
Step 1: Calculate your minimum and maximum possible ad budget
As mentioned above, most businesses allocate 5 to 10 percent of their annual revenue to advertising. Here, 5 percent would be the floor and 10 percent the upper limit.
To give you an example, here’s the average marketing budget (including branding) as a percentage of revenue according to a Gartner survey.
Start by calculating these lower and upper limits on your ad spend.
To do this:
- Take 5% and 10% of your projected annual sales
- Multiple each of these figures with the average markup per transaction
For example, suppose your business is projected to do $1M in annual sales this year.
5% and 10% of your annual sales would be $50,000 and $100,000.
Now suppose that your profit margin is 60%, i.e. you make $600,000 in profits with $400,000 in costs.
Therefore, your markup would be 150% ($600,000/$400,000 * 100).
You have figures like this:
|Annual Sales (A)||5% of Sales (B)||10% of Sales (C)||Markup (D)||5% of Markup (B * D)||10% of Markup (C * D)|
Thus, your minimum and maximum ad budget is $75,000 and $150,000.
Step 2: Calculate adjusted ad budget
The above is your raw budget since it doesn’t include your cost of occupancy (i.e. cost of running the store).
To get your adjusted figure, simply deduct the cost of occupancy from the raw minimum and maximum budget.
For example, suppose these are the annual costs associated with running the store:
- Payment processor: 2% of annual sales ($20,000)
- Hosting: $1200
Thus, your cost of occupancy is $23,600.
Your adjusted ad budget is as follows:
- Minimum: $51,400 ($75,000
- Maximum: $126,400 ($150,000
This figure tells you how much you can expect to spend on ads each year.
The purpose of advertising is to increase exposure and drive people to buy from your store. And to advertise effectively, you need an ad budget and a plan on how to spend it.
Though calculating your first ad budget can be difficult, it is worth the effort. Doing so will help you reach more people and increase sales which means more money to spend on ads down the line.
Read also: 11 Practical Tips for Marketing on a Budget
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