Starting Ad Budget

What you’ll learn in this article:

  • Why do you need to set a starting advertising budget
  • The formula for a starting advertising budget
  • Examples of how to create a starting budget

Why you should read this article:

  • So you don’t overspend on ads
  • So you don’t underspend on ads
  • So you understand what you should get from your ad spending

Why You need an advertising budget

If you are running ads for the first time OR you aren’t receiving the results you expected from your ad spending, this article will help you. If you aren’t a Facebook Advertising expert, finding your starting budget probably sounds like rocket science. The reality is that it’s actually very simple and not at all confusing once you learn how to do it yourself. So, what’s needed to find out your starting budget? You need to know these 5 metrics:

  • Average Customer Value
  • Acceptable Customer Acquisition Cost
  • Lead to Customer Conversion Rate
  • Acceptable Cost Per Lead
  • Minimum Customer # To Make Campaign Worth It

Once you are clear on the values of these 5 metrics, you’ll be able to fill in the equation for your starting budget. The equation is simple:

  1. Your average customer value = the cost of your products/services
  2. Your acceptable customer acquisition cost is around 10-30% of your average customer value. (This is just how much you are willing to spend for a customer’s purchase)
  3. Next, you need to multiply your acceptable customer acquisition cost by your lead to customer conversion rate (the percentage of leads that turn into customers) to get your acceptable cost per lead
  4. Ask yourself “how many customers will make this ad campaign worth it” then multiply that number by your acceptable cost per lead
  5. That number you get is your starting budget!

Now that you know the equation, let’s go deeper into each of the 5 metrics you need to make this equation work. Read these 5 things so that you can clear up any confusion on how those values are created for those metrics.

Average Customer Value

The average customer value is the simplest of all these metrics to measure. This is just the value of the purchase made by your customer. Here’s an example: Jerry owns a design agency and sells web design services for $10,000 per client. This means that the average customer value for Jerry is $10,000. Simple as that. What do you charge for your product or service? Whatever the answer is, that’s your average customer value.

Acceptable Customer Acquisition Cost

What does it cost you to deliver your service or if it’s a product, what is your cost of goods? Once you know this, ask yourself what are you willing to pay for customer acquisition. 10%? 20%? 30%? This answer will be up to you but I recommend 10%-30% of your average customer value. Let’s go back to Jerry: If Jerry values his customers at $10,000 and it costs him $1,000 to deliver his service to his clients, that leaves him with $9,000 revenue. Jerry thinks about what he is willing to pay for his customers and decides that he’d be willing to pay 15% of that $9,000 to acquire a new customer. This leaves him with a total of $7,650 revenue per customer and a budget of $1,350 per customer acquisition.

Lead To Customer Conversion Rate

How many of the leads that you generate convert to paying customers? This can be found out from your sales analytics that you should be tracking. If you don’t have this being tracked then ask yourself what’s the percentage of people that are interested in your product or service actually convert into customers? This will vary from business to business. Let’s go back to Jerry: Jerry tracks the leads that he gets from his website and sends them a sales campaign when they become a lead. He understands that for every 10 leads he gets, he usually converts 2 of them into customers. This means that he can divide 2 (the leads that turn into customers) by 10 (the total leads he gets) to get his lead to customer conversion rate, 20%. Jerry converts 20% of his leads into paying customers.

Acceptable Cost Per Lead

What is the max amount you need to spend on a lead? This is very simple to find out. The value is your acceptable customer acquisition cost multiplied by the lead to customer conversion rate percentage. So if Jerry has an acceptable customer acquisition cost of $1,350 and a lead to the customer conversion rate of 20%, his acceptable cost per lead = $270 (1350*20%=270). This value is the maximum you need to be spending on a lead for your business. Depending on how good your sales funnel is, this number will hopefully be way lower in actuality, which is the goal.

Minimum Customer # To Make Campaign Worth It

Lastly, you need to know the minimum amount of customers that will make your ad spending even worth it. This is important because if you aren’t receiving the number of customers you want from your ad campaigns, you probably won’t put much effort into them. When you are spending money to make money, you need to make sure that it is worth it. Find out the minimum amount of customers that you want to make this campaign worth running. For Jerry, he needs a minimum of 2 new customers per month to make this ad campaign even worth running.

Your Starting Budget

Now that you have those 5 metrics cleared up, you can calculate your starting budget. Your starting budget should be whatever is required in ad spend to generate your minimum customer # to make your campaign worth it. This number is simply your acceptable customer acquisition cost multiplied by the minimum customer # to make your campaign worth it. So, why did we have to find the values of those other metrics? You need to know your current lead to customer conversion rate and your acceptable cost per lead so that you can track those values as you run your campaign. If those two values fluctuate, you need to adjust accordingly without spending more than your acceptable cost per lead. Your lead to customer conversion rate can affect your acceptable cost per lead too, that’s why you need to know those two things beforehand. Let’s refer back to Jerry to get more clarity: Jerry multiplied his acceptable customer acquisition cost ($1,350) by the minimum customer # to make his campaign worth it (2) to find his starting budget ($2,700). While running his campaign, he learned that he is converting 40% of his leads instead of 20%. This means that he can subtract 20% of his budget to still reach his minimum target customers. With this new knowledge, he brings his budget from 2700 to 2160 and he will still reach his target amount of customers. This increases his total revenue from $7,650 to $8190!

Conclusion

Having a clear starting advertising budget for your business is a necessity to making sure you don’t overspend, underspend, or get overwhelmed with confusion and frustration. If you follow these steps and clarify your starting budget you’ll be able to adjust your campaign accordingly, understand why you are getting the results you are getting, and how to improve your ad spending in the future. Good luck with your campaigns and I wish you nothing but the best!