You’ve decided that it is necessary to run digital marketing campaigns to drive more traffic and find more customers. But how much should you spend?
It is almost impossible to give a blanket answer to this question because depending on the platform, level of competition and your goal, the amount you need to invest can be vastly different. However, there are luckily benchmark numbers we can take into consideration when planning your budget. (If you don’t want any of the explanation just a simple framework to estimate budgets, go straight to the end.)
PPC Ads & Pricing
First of all, Facebook, as well as Instagram, Google Adwords and Pinterest are all mainly pay per click advertising platforms. This means technically you only pay if an interested potential customer clicks on your ad. The average click-through rates – how likely are people to click on ads – is varied based on industry and of course, ad content. In retail or hospitality, it’s fairly easy to get people to click, because of our tendency to enjoy window shopping or looking at luxurious holidays, even if we have no intention to buy.
Secondly, the pricing of these clicks is dynamic, depending on how many other businesses are trying to target the same audience or keywords. With 5 million advertisers on Facebook at any given time, the competition for eyes and clicks is ever so fierce, resulting in less than satisfying cost per click pricing and weaning results. Every advertising method reaches this stage when the target audience is used to it and ads largely become invisible, but due to wider adoption by advertisers, the demand keeps the price disappointingly high. Andrew Chen calls this the law of shitty click-through rates and it means two things for you as a business owner:
One, the creativity, imagery and copywriting of your ads matter more and more. While precise targeting is the first principle of good pay per click ads, marketers have to start to compete with great creative too. Two, you need to pay attention to new emerging platforms and the freshest advertising tools the old ones offer. For example, Facebook Stories or Messenger Ads are still new enough to catch our eyes and drive higher impressions and engagement rates.
Back to the benchmarks. I usually turn to Adstage’s quarterly report to have a high-level view of how each platform is doing for advertisers. You can download the latest PPC ad report here and see a breakdown of different social ad channels. In Q2 this is how these numbers looked for Facebook:
Based on these figures you could assume that each click to your site will cost you around $0.43 and around 2.24% of people who see your ad will click on it.
But let’s look into how this breaks down for the different industries! It is easy to see in Wordstream’s mid-2018 data that there are vast differences between ads for products that are considered fun and exciting, compared to others that are widely seen as boring.
Based on these figures, if you want 1000 visitors on your link, you need to spend around $450 in retail, or $3,770 in financial services, which is traditionally expensive to advertise.
But how many of these people will actually buy from you?
Conversion rates – the percentage of people on your site who convert into leads or customers – also vary greatly depending on industry and how these visitors ended up on your site.
Let’s do the math for our retail and financial services example.
Based on benchmarks, out of the 1,000 visitors you have bought for $450 and $3,770 respectively, 41 will make the purchase in retail, and 90, if you run a financial services business.
In other words, you’ve just spent 450/41=$10.09 on one customer, if you are in retail.
Your financial services cost per acquisition would be $3,770/90=$42.8 for one new customer.
So how is this worth it for me?
The next step is to decide whether this Cost Per Acquisition (CPA) makes financial sense for you. The simplest way to look at this is taking only this one purchase into account.
Let’s say you spent $10 on getting one customer who converted.
Her subsequent purchase was $30.
The item cost you $10.
This means 30-10-10 = $10
You have made $10 revenue, going towards your overhead, staff etc.
If you got a customer for $10, but the item he purchased is $200 on an item that cost you $100, then you’ve just made $80 in revenue.
Ideally, customers end up returning and buying again after having a fantastic experience with you. In fact, keeping and re-engaging them is one of the most important parts of your marketing strategy.
Simple budget estimate framework using the benchmarks above
Let’s say you want to make $2,000 in a month and you have a retail website.
Items on average cost $50.
Each item has a 100% markup, making your revenue per item $25 on average.
To make $2000 in revenue, you need 80 occasions of 1 item purchases.
The average conversion rate in the industry is 4.11% from Facebook ads.
In order to determine how many visitors you need to achieve 80 purchase, we will work with this conversion rate.
If 80 is 4.11%, then 1% is 19.46, making 100% 2,285.
This means on average you need to drive 2,285 visitors to the website via Facebook ads to convert 80 poeple at 4.11% conversion rate.
At $0.45 a click, you are looking to spend $5,077 in a month to sell $4,000 and make $2000, which doesn’t sound like such a great deal.
However, we’d expect customers to purchase more than 1 item and also to return to us later – at no or little extra cost spent.
*Replace it with your choice of PPC platform.