How much is it ok to spend on digital ads?

Today more than ever, paid media is an important piece of customers’ marketing mix. According to eMarketer, in 2019, worldwide digital advertising spending accounted for roughly half of the global ad market for the first time (global ad spend has reached $333.25 billion).

Though, when you own a small business or a startup, you may naturally feel like your spending on digital ads are high, especially when you see the monthly bills.

It’s natural to keep it as cost-efficient as possible. Still, what matters most is what you get out of your investments. In this article, we’ll take a closer look at what metrics can help you see if your ad spending is really too high.

Determining your ad spend return

The key metrics that will help you get the complete picture on whether your ad spending is justified are customer acquisition cost (CAC), lifetime value (LTV), and return on ad spend (ROAS).

CAC: Customer Acquisition Cost

This is a primary metric which is still something worth spending time to calculate. Simply put, CAC lets you measure how much it costs you to get a sale. You don’t need to get too deep with this metric, but knowing how much you can spend to get a sale is really valuable.

To calculate the CAC, you simply need to divide all your online advertising expenses by the number of customers acquired in the same period through this channel. For instance, if you spent $1000 on ads in a month and got 1000 customers, your CAC is $1.00.

Is there any benchmark for the CAC? Hardly ever. It depends much on the type of your business and audience you’re targeting to, your product or service cost, and overall revenue plan. 

However, there’s a specific thing you can keep an eye on. It’s crucial to keep the balance between the CAC and LTV. As long as the LTV is larger than the CAC, your advertising efforts are working well.

LTV: Customer’s Lifetime Value 

The client LTV, or client lifetime value, is a measurement of what the average client will pay you overtime. 

If you’re selling a one-off solution with a perpetual price, say, $50, your LTV is $50. By contrast, if you sell a $1000 solution with a $100 annual maintenance contract and your average client sticks around for five years, your LTV is $1500. 

To know your LTV, you need to calculate how much each customer brings you within an average purchase, then how many purchases they make in a certain period of time, and how long the average customer sticks around your product or service. 

ROAS: Return on Ad Spend 

ROAS is another essential metric letting you optimize your ad spend properly. Basically, ROAS is the amount of money you make from your online ads. The healthy starting place for this is a 5:1 return-on-ad spend, for instance: you spend $1000 – and get $5000 in sales.

Together with customer’s lifetime value, insights from ROAS across all campaigns can help you plan your future budgets, and overall marketing strategy. Plus, this metric provides you with insights for informed decisions on where to invest your ad dollars.

How can you optimize your ad budget?

There’s always room for improvement, though. Even when you’re happy with the return of your investments, you might naturally want to spend a smaller percent of your revenue on digital advertising.

Here are several tips on how you can optimize your ad spend before you run your campaign: 

Fine-tune your targeting

Allocate the target audience into segments according to the valuable targeting indicators, and qualify these segments using data on sales committed, the profits brought customer lifetime value, and so on.

Test, test, test

Test your ads early on: test your ad formats, types, messages, and everything you can. It first may cost you a bit more when you set up several campaigns with different settings, yet it will let you identify the most performing option and cut off what doesn’t work.

Focus on best-performing channels

Define the domains that draw the most ad spend and meet or exceed the desired KPI at the same time. The good decision here is to raise the bid for such websites in the ad campaign settings.

Filter out the bots 

Use blacklistings to filter out fraudulent traffic. Thus you can cut out the domains serving impressions on which has proved to be systematically ineffective practice. 

Wrapping up

As an SME founder, you want to be very careful about how you spend your budget. Yet, the online ads market addresses this challenge by offering many media platforms and channels for affordable costs. Start with small budgets, tune and test your digital ad campaigns a lot, and precisely be always aware of your ad investments are justified.

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