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Calculating Ad Budget To Match Your Business Goals

Calculating Perfect Ad Budget To Match Your Business Goals

7 min read

So you’ve decided to start an ad campaign for your e-commerce store?

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.

For an e-commerce store, managing expenses is a perennial challenge. But while costs for web hosting and inventory are generally straightforward, figuring out your ad budget can be difficult.

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 e-commerce store.

Ready? Let’s dive in!

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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 Goldilocks-like “just right” zone that will bring in results without affecting your margins.

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-cCommerce store 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:

MarginMarkupCost of occupancy
Product #133.33%50%
Product #254.54%120%
Product #337.5%60%
Average for Store43.39%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 niche-specific stores.
  • 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 7-8 percent on marketing.

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.
the average marketing budget (including branding)

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:

  • E-commerce software: $2400
  • 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  $23,600)
  • Maximum: $126,400 ($150,000  $23,600)

This figure tells you how much you can expect to spend on ads each year.

Key Takeaways

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.

Do you want to learn more about advertizing with Google?

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About the author

Lina is a content creator at Ecwid. She writes to inspire and educate readers on all things commerce. She loves to travel and runs marathons.

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