How to Start Planning an Effective Advertising Budget

It’s the big question that businesses of all sizes must ask: “How much should I spend on advertising?” While answering this question is vitally important, it may be particularly challenging. Businesses and brands are reevaluating their advertising and marketing methods, which these days increasingly lies in digital marketing. This in turn has forced them to also rethink their budgeting alignment.

Digital marketing is now one of the most important forms of marketing. Nearly $356 billion U.S. dollars were spent on digital advertising in 2020, a figure that is expected to grow in the upcoming years. According to economic forecasts, digital advertising revenue will amount to $460 billion by 2024 with retail, automotive, and financial services as the industries with the biggest budgets.

Getting Started

When budgeting, all costs associated with marketing a business need to be considered. These include traditional and digital efforts, hiring costs, marketing tools, website development and maintenance, creative (graphic design and copywriting), trade shows, and more. A smart marketing budget will help a business:

• Stay on financial track

• Establish benchmarks and goals

• Invest in business growth

• Make long-term plans 

On average, marketing budgets for larger businesses make up around 10% to 14% of total company budgets across all markets. For small businesses, that average is around 8%. New companies or startups that are focused on brand building and quick growth generally allocate up to 20% of sales on marketing. B2Cs usually spend more on marketing compared to B2Bs based on their target audiences and objectives. 

Data to Consider

There is no crystal ball that can magically tell you how much to spend on a marketing budget that works for your business. Before you even get to that point, here are a few essential questions about your business you should ask first:

• What percentage of gross revenue can I afford to spend on marketing?

• How much investment is needed in order to hit revenue goals?

• What is the lifetime value (LTV) of my average customer?

• What is your average conversion rate and cost per lead?

• What are your expectations for return on ad spend (ROAS) and return on investment (ROI)?

It also helps to know your customer base and their habits. Where are they spending their time, and what digital channels do they frequent the most? When are they shopping, what are they shopping for, and how can you increase transactions? 

Covering these bases first will go a long way towards establishing a budget that works for your business. Once you answer these questions, it’s time to come up with a budget. 

Creating a Budget That Works for Your Business

The reality is, there’s not one perfect formula that fits every business. There are many factors to consider when assigning your ad budget such as business size, your company’s industry, how long you’ve been in operation, total sales revenue, your business’s pain points, and cost per acquisition. The key is to determine what you can afford to spend and how to best utilize those funds. 

Maximizing Your Ad Dollars

Once you’ve set a budget that works for your business, it’s important to use it wisely by allocating funds into the right places. Here are some ways businesses can optimize their marketing:

Look to the Past: One of the simplest ways to figure out where to use your marketing budget is to review what was successful for you in the past. If it worked before, it is a great starting point for moving forward.

Lose What Isn’t Working: Why dump money into campaigns or strategies that are getting lackluster results? It’s best to ditch the poor performers and invest time and money into those that produce the best results. 

Develop Customer-Centric Strategies: Customers with strong attachments to a brand deliver a 23% premium over the average customer in both profitability and revenue. That means money spent on personalized customer-focused strategies is money well spent.

Choose Your Digital Platforms Wisely: It’s important to do your research so you can put your money into the platforms your audience frequents the most. This means applying strategies like segmenting your audience and refining your messaging for the greatest impact. 

Invest In Conversion Rate Optimization (CRO) Marketing Tools: If people aren’t converting, your strategies are not working. That’s why it’s
wise to invest in conversion rate optimization (CRO). Whether through A/B testing, lead nurturing strategies, or using marketing automation software, CRO strategies can dramatically improve conversion rates and customer retention.

Reevaluate and Reassess

 As your business evolves, you may find you need to reevaluate your current budget allocation. It’s important to compare your campaign performance to your business plans, determine whether you need to adjust saving or spending in either direction, and analyze your cash flow. Smart data analysis will help with that. Since digital advertising is constantly changing, being able to optimize performance and shift budgets across platforms as needed will allow for the smartest and most effective use of your ad dollars.

 A marketing budget is a delicate balancing act: spend too much and you’ll break the bank; spend too little and no one will know that you exist. But one thing is clear: having a clear marketing budget is an integral part of an overall business plan.