Is Your Digital Marketing Budget Too High, Too Low Or Just Right?

Whether you’ve been running digital marketing for years wondering about the efficiency of your budget, or you’re thinking about launching a campaign and having trouble deciding how much you need to spend, this article will detail a proven process that will help you arrive at the right number.

The first element that needs to be covered in any campaign is determining your desired goal. This is the easy part. How much revenue do you want to generate from the campaign? How many items do you need to sell?

The next objective is much more challenging and showing you how to rise to that challenge is the overarching purpose of this article.

How much of a digital budget do you need to invest to reach your stated goal? Most SMBs do not think granularly enough here. They realize they need X-amount of sales/new customers and start estimating it will take a budget of Y-amount to cover that goal, with the understanding they can always raise or lower their budget as the metrics start to flow in.

This is not a bad approach. It displays common forecasting methods by arriving at the number of sales/new customers needed to reach a stated goal, so it is a far better method than throwing a random budget at the wall and waiting to see what happens. However, there are still more layers that can be broken down to unveil deeper insights around the amount of new sales you need to acquire and the total budget you must spend to do so. These insights will prove instrumental in setting the all-around expectations of your campaign, giving you the best chance to be on target from the onset.

Before we continue, we must acknowledge the elephant in the room. Digital advertising can be intimidating with the massive amount of technical jargon and lack of tangible (or sometimes even visible/audible) reinforcement while a campaign is running. If you are not in the target audience, you probably are not going to ever see your ads, but that does not mean they are ineffective; quite the contrary. It is natural for anyone to become a bit uneasy of the things we do not fully understand or cannot see. But for everything you cannot see, it is critical to realize that no aspect of digital marketing should be unknown to you. The reason the formula we are about to outline works is because digital marketing is the only form of marketing that is 100% measurable and transparent. That is, if you have an honest and experienced vendor/partner. This transparency is an element that should be embraced and your vendor/partner running the campaign should be held accountable, to the highest degree.  

Back to the process …

We have established that you already know the return on investment you need to generate from this campaign. Now we can methodically work through what the actual investment should be. To do so, ask yourself the following questions:

1. What is your average revenue per order?
2. How many current customers do you already have in your footprint?
3. How many additional potential customers exist within that same area?
4. Will you need to expand the geography of the campaign to achieve your desired results?
5. What is your website or landing page’s conversion ratio for leads?
6. Just as important, what is your company’s closing ratio for those leads to turn into sales/new customers?

Now let us explore in depth each of these questions.

You may be thinking, “I know my ARPO and how many current customers exist in my footprint, but how do I determine the amount of new/potential customers in my primary marketing area?” The answer is simple and should not rest on your shoulders. Great digital vendors/partners have resources they can tap into to provide you with this knowledge. It may be as easy as running potential audience counts in Facebook or Keyword Planner research in Google. The very best digital companies can even help you with third party data from online and offline sources to empower you to make the best decision in forming a clear picture of how many fish are in your pond. If you uncover there just are not enough fish, you will simply want to expand your campaign footprint to build a larger pond, or add more ponds, to fish from.

This next area presents a common stumbling point in this process: determining your website or landing page’s conversion ratio for turning traffic into leads. For example, if you are driving campaign traffic to a particular landing page containing a contact form, phone number, and/or live chat, what percentage of traffic that reaches the page interacts with those mechanisms to create a lead? Most SMBs do not know this information, but it is not difficult to figure out. If your site or page typically receives 1,000 users in a month and you typically receive around 12 phone calls, 8 form fills and 30 live chats monthly on average, you are looking at an average of 50 interactions per month per every 1,000 average users. This represents a lead conversion ratio of 5%.

From those 50 interactions on average per month, how many orders do you process in an average month? This will represent your closing ratio. We will use 10 as an example for the number of average orders you convert from leads to sales in any given month. Now you are looking at a 20% closing ratio for turning leads into sales.

As we assumed, you already know your ARPO. For the sake of illustration, let us say it is $250. You now have every element needed to determine your target budget. You can now , methodically work backwards to form the right budget. It will look something like this:

• Your revenue goal is $7,500 in new orders. Your ARPO is $250. This means you will need 30 sales/new customers to reach that $7,500 level. Remember, you typically already generate 10 orders per month on your own, so you will need your advertising to generate an additional 20 per month to reach that number of 30 sales/new customers (detailed explanation below).
• We have already established that for every 1,000 monthly users/clicks you drive to the landing page you will generate an average of 50 interactions.
• You also already know that for every 50 interactions you generate you will close an average of 10 new orders.
• At a $250 ARPO, 10 news orders represent $2,500. This is what you typically gross organically in a month without a digital campaign, so you will want to triple your sales during the campaign to obtain another $5,000 per month.
• By this math, you will need your campaign to drive 2,000 more monthly users to the landing page on top of the 1,000 that find the page on average without a campaign, because 2,000 more monthly users, or clicks to the landing page, should lead to 100 new interactions at the 5% conversion ratio we established above.
• Those 100 new interactions should lead to 20 additional orders at the 20% closing ratio we established above.
• At an ARPO of $250, those 20 new orders should lead to the additional $5,000 you will need to meet your revenue goal.
• That $5,000 generated from the campaign added to the $2,500 you typically generate on your own in an average month, should enable you to attain your revenue goal of $7,500.

With this process, determining a budget is no longer guesswork. Now it is just basic math.

The last variable in this process is asking your digital vendor/partner how much each click will cost to drive to the landing page. For the sake of simple math, we will pretend they tell you that each click will cost around $1. For your digital marketing to drive those additional 2,000 clicks/users per month to your site, you are looking at a budget of $2,000 (at $1 per click) to make another $5,000 in sales revenue per month.

Congratulations! You have arrived at the right budget number. It is a lot of basic math and we are here to help you out if you like. Please use the contact form at the bottom of this page and let us know how we can assist.  

In closing, it is important to remember that all of this can be moot unless the digital experience is solid. A strong UX also means you can optimize your conversion and/or closing ratios to get the most out of your budget which equals even more revenue to take away from the campaign. In closing, here are a few bonus steps in the process to consider after arriving at your budget number that will help ensure an optimal user experience and increase your bottom line: