Many people have a hard time deciding their advertising and marketing budgets. These are two crucial elements of a business plan. Unfortunately, it's can be tricky to figure out the right percentage of revenue to allocate to them.
You shouldn't have to stress out or play a guessing game with your budget. This article will give you a framework for looking at these expenses in a more effective way.
Marketing vs. Advertising
It is important not to lump these two terms together. Before you allocate your budget, you need a clear understanding of how they are different.
Marketing is all about branding. You need great digital assets ranging from a website to social media if you want to attract people to your business. Evergreen content is another big piece of the marketing game.
Advertising is about outreach. This usually takes the form of a paid advertisement, such as a commercial on TV or a newsfeed ad on Facebook.
The advertising landscape is always changing. For example, sponsoring a podcast is now a good way to get your brand in front of a lot of people. Brands are even sponsoring live streams and Instagram posts as they try and capitalize on new media opportunities.
It's good to keep these distinctions in mind when creating a budget for your business. You want to be clear about where your money is going.
Budgeting for Marketing
There are a few assets that every company needs for its basic branding package. You can use these to determine a baseline for your marketing budget.
Your website matters because it's a quick indicator of how professional your business is. Anybody who hears about you is likely to google your business name. You want to have your website show up near the top of the results and to be helpful for that person.
A good website experience often leads to further interest in your brand. Factor the cost of a professional website into your marketing budget if you don't already have one.
Social Media Banners
Good social media banners and photos are another key part of your online presence. The visual quality of your social media pages will make a big difference in how people perceive your brand.
If you don't have enough money for a lot of banners, keep it simple. Only use as many social media platforms as you can afford to maintain.
The last asset, evergreen content, refers to any online content that will remain valuable for many years to come. This can take the form of videos, podcasts, blog posts, photo galleries, or anything else that will still be useful years from now.
Measure what your audience is interested in before you start making content. You should also look for long tail keywords that you can target for SEO purposes. Video tutorials are often a great way to start with your brand's content strategy.
The total cost of these assets will tell you what the minimum percent can be for your marketing spend. You can add on more costs from there, like a day-to-day social media manager, if you have enough money to pay for it.
Budgeting for Advertising
Many articles out there suggest that you should stick to a certain percentage range (often 7-12%) when you budget for ads. This makes for easy advice, but it isn't necessarily the best way to look at it. Instead, consider a different perspective:
Your goal with advertising is to spend money in the short term to earn money in the long term. The most important two metrics when doing this are the Lifetime Customer Value (LCV) and the Cost of Acquisition (CoA).
You want to spend as much money on advertising as you can as long as the LCV is significantly higher than the CoA. The other limit is how much capital you have available in the short term as compared to how long it takes for the customer to give you money.
If the LCV is $20,000, but they will only pay most of it in 50 years, it will be hard to survive long enough to get that money. On the other hand, if the LCV is $100 but they spend it all today, that would lead to a hugely profitable campaign right away. The more ads you run in that scenario, the more you earn, at least until the market dynamics change.
For many businesses, especially ones that are younger, there may not be solid statistics on the LCV or CoA. You can still do some basic short term math that helps you see how ads are having an impact on your bottom line.
Measure your conversion rate on the ad. When somebody clicks your ad, how likely are they to buy the product?
You can do the math on the cost of each ad, the conversion rate, and the profit margin of your product. If you turn a profit on that formula, you should advertise as heavily as you can until the numbers change.
Simply spending a certain percent of your money on ads because it's "the magic number" can have disastrous results. Don't listen to common percentage ranges. Instead, use the math of profit to dictate how much you spend on advertising.
Final Thoughts on Setting a Budget
Budgeting is a skill that takes time to develop. It's a slow, long-term process that takes years before your instincts are truly honed.
This article gave you the insights to do a better job with your budget. Remember that your goal with your marketing budget is make sure you can afford at least the minimum of great branding assets online. Your goal with your advertising budget is to use the ROI of your ads to guide your spending.
If you understand those basic concepts, you will be able to determine an effective advertising and marketing budget for your business.