3 easy steps to help you calculate your monthly advertising budget
As the Head of Advertising, once we onboard new advertising clients, they rely on me when it comes to budget allocation.
But it’s also friends that are thinking about starting a business or launching a product. Or even from acquaintances who are just curious about the topic.
- How much money should I invest in Facebook/Google/Linkedin ads?
- What’s a good budget for “x”?
- How much should I pay for acquiring a new client from the US? What about Canada?
And so on.
If I had a penny for every time I heard one of these questions, I wouldn’t necessarily be rich (I didn’t want to go to that cheesy old saying) but it would definitely add up to pay for lunch. And a coffee.
What you’re selling will define your investment
We all know that there is not such a thing as “expensive”.
It’s all about profitability.
If paying $100 for acquiring a new client might be out of the question for 1 business, it might be peanuts for another one.
When you have a dropshipping business that goes for volume, the investment that will make sense for you will be totally different than the one of a SaaS company.
Just for the sake of simplicity, we’ll take the first example as a one-product business. So let’s say that you’re selling just one product on your website. We’ll go the classic route – you buy it from a supplier and resell it for a profit.
What does “profitable” mean to you?
To answer this question, you have to write down things like:
- What is your acquisition cost for the product?
- Include all fixed and variable costs such as buying price, shipping, insurance etc
- And make sure you calculate the cost per product.
- What is your selling price for the product?
- Then, an easy one, how much do you want to sell your product for?
- How much profit are you looking to make in a month?
- And last but not least, what’s the gross profit you want to get and makes all this worthy for you?
Are you ready?
Let’s do this.
Let’s say you’re investing $150 in the product and you are selling it for $300
And your profit target is $3000.
This means that you will have to sell 20 products to hit your target, right?
Eeerrr! Nope.
This is where most people fail when doing their initial calcs.
Your gross profit is represented by the product margin – the advertising cost.
So, to make a profit, your client acquisition cost has to be lower than the product profit margin.
Obviously.
But how much lower?
From our experience of working with hundreds of clients, we believe that the client acquisition cost should be about a third of the product margin.
- You sell the product for $300
- And the investment (without advertising at the moment) to acquire the product is $150
- That gives you an initial margin of $150
- Given that, we recommend considering ($150/3)= $50 as an investment to acquire a new client
- Which leaves you with $100 gross profit for each product you sell.
This means you will have to sell 30 products to reach your target of $3,000 in gross profit.
And you’ll get that $3,000 gross profit by investing $1,500 on advertising.
Do you wanna scale it from here?
Easy!
If you wanna make $30,000 in profit, then you need to invest $15,000
If you want to make $300, 000 in profit, then you need to invest $150,000
And so on.
Important note:
While there is no minimum advertising budget to start advertising on social media platforms, if you want to scale fast, we highly recommend setting up a minimum budget for acquiring at least 200 new clients/month, – no matter the platform you’re advertising on.
Why?
Because you have to give room to the algorithm to learn about your product and how the market reacts to it. It will also take about 2 weeks to exit the learning phase – so make sure you set up a daily budget that will allow you to run your ads for at least 4 weeks and cover at least 50 potential conversions/week.
The more data, the more insights, the more optimization opportunities.
What if you don’t have a budget for 50 sales/week?
The 50 conversions/week rule may put you off at first, but things aren’t as grim as they seem.
Going back once more to our example above, to cover the 50 weekly conversions and sustain this for 4 weeks, you would need to invest $10k.
That could be a lot if you’re just starting off.
So what can you do?
Well, you can define multiple conversions higher in the funnel to give the platform the chance to optimise on.
You might want people to watch a demo video of your product.
Define that as a conversion. It will definitely cost a lot less than the actual purchase, and the platform will have an objective to optimise on and exit the learning phase.
Maybe you want to go one step closer to the actual purchase.
That’s easy. Just define an intermediate goal like add to cart and use it as a conversion in your campaigns.
This will help you exit the learning phase sooner, as more people will be adding to cart compared to the ones who actually purchase.
Plus, if you do this, you’ll build yourself a suuuuper powerful retargeting audience full of people who abandoned their cart (assuming you got your tracking right).
Maximize on these new audiences and you’ll take advantage of the new revenue opportunities.
We’ve created this simple calculator to help you estimate your initial budget:
