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How To Determine The Budget For Paid Ads Campaigns

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One of the most discussed, yet misunderstood, aspects of launching a paid campaign is its budget. Not setting realistic projections for a marketing plan can destroy a business.

Imagine

A small e-commerce brand making $50k per month has the goal of scaling to $150k per month with paid advertising. The internal team runs with their gut feeling, believing they could achieve the additional $100k in revenue by spending $30k per month on ads.

However, had they referenced existing data to set an accurate projection, they would have discovered their average Return On Ad Spend (ROAS) was only 2x. In order to achieve an additional $100k in revenue from the planned $30k, they would have to build a plan to improve their marketing performance to achieve a 3.3x ROAS. Using historical averages, this revenue increase would require $50k instead of the original $30k projection.

By using historical averages, they gain the ability to better predict future outcomes. Once a brand understands its existing data, making a plan for growing and expanding is easier. We’ve observed many ways that brands determine the required investment for their marketing efforts, but today we’re going to dive into our own method to help you set accurate projections and set realistic KPIs.

Knowing Your Campaign and Industry Averages

If you’ve never run ads and are looking to start, then projecting your marketing performance can be difficult if you don’t know where to look. Thankfully, there are many resources available to provide you with some of the basics to have a window into how your campaigns could perform. To provide a window into how your campaigns could perform, we’ve created a graphic based on data we’ve gathered from third-parties and our clients’ performance over the past few years.

NOTE: To get the most out of the graphics below, use the data as an indicator of how average brands perform within particular industries. This will ensure you don’t set unrealistic expectations for your current product, content, offer, etc.

Average Cost Per Action (CPA) metrics by industry
Average Cost Per Click (CPC) metrics by industry
Average Click-Through Rate (CTR) metrics by industry
Average Conversion Rate (CVR) metrics by industry

Now let’s leverage this data to set growth projections and targets. Below is a list of metrics we’ll need to pull from industry data and our historical account averages:

  • Planned Monthly Budget
  • Cost Per 1k Impressions
  • Click-Through Rate
  • Website Conversion Rate (From Ads)
  • Average Cost Per Purchase
  • Required Return On Ad Spend
  • Average Order Value

Setting Goals And Understanding Your Data

The most common goals when growing a business are Gross Revenue and increasing the Average Order Value (AOV) of first-time customers. These goals can be directly influenced by paid marketing performance — especially with cold traffic targeting.

Cold traffic is the most expensive and difficult audience to convert. Improving the cost of turning cold traffic into revenue is one of the most powerful optimizations you can make to your ad campaigns.

To set these goals, start by determining your current averages and how much they’ve changed over the last few months, quarters, and/or years. Doing so will help you understand how your business is changing and where you can improve. 

You might find that your business is growing by 12% annually, but new executives want to aim for a 20% growth rate in the upcoming fiscal year. By comparing campaign performance to growth goals, you can begin to understand the difference between targets, realistic goals and what levers you need to pull to reach them.

Example

Let’s use the goal above as an example in our projections:

Current Averages

  • $50,000 Monthly Recurring Revenue (MRR)
  • $50 Average Order Value (AOV)
  • $12,000 Current Ad Spend

Growth Goals

If the company is looking to grow by 20%, then we have two levers we can play with to reach that goal:

  1. Improving the customers’ Average Order Value, which increases ROI on every customer engagement.
  2. Focus on reinvestment, increase spending, and convert more customers at the current rate.

Average Order Value Focus

In the example below is focused on the kind of performance targets that you’d set for a business if 

  • $60,000 MRR (20% increase in revenue)
  • $60 AOV (20% increase)
  • $12,000 (Maintain current ad spend)
  • The High-Level Breakdown:
    • 60k (MRR) / $60 (AOV) = 1000
    • $12,000 (ad spend) / 1000 (monthly orders) = $12 CPA
    • $60 AOV / $12 CPA = 5x ROAS

Ad Spend Scaling Focus

  • $60,000 MRR (20% increase in revenue)
  • $50 AOV (maintain current performance)
  • $14,400 (scaling ad spend by 20%)
  • The High Level Breakdown:
    • $60k (MRR) / $50 (AOV) = 1200
    • $14.4k (ad spend) / 1200 (monthly orders) = $12 CPA
    • $50 AOV / $12 CPA = 4.16x ROAS

Lead in copy into the option to focus on both

Average Order Value + Scaling Focus (Hybrid Model)

  • $60,000 MRR (20%+ increase in revenue)
  • $55 AOV (increase AOV by 10%)
  • $14,400 (scaling ad spend by 20%)
  • The Projection Breakdown:
    • $14,400 Ad Spend / $12 AVG CPA = $1200
    • 1200 monthly orders x $55 Average Order Value = $66000
    • $66,000 potential performance / $60,000 growth goal = 9.09% or a 29.09% increase in monthly income

There are many ways to use your campaign data and goals to ensure you have the right plan in place. In the example above, if we’re able to make just a few slight adjustments to our AOV and maintain performance as we scale our campaigns, we’ll outperform our internal goals. Even better, by making small adjustments to both levers, we greatly increase the likelihood of reaching the initial goal if the market changes.

Putting It All Together

Let’s take all of the metrics we’ve covered and run them through a calculator. Remember, the goal is to determine realistic projections for campaigns.

Example Metric Averages

  • Planned Monthly Budget = $25,030
  • Cost Per 1k Impressions = $14
  • Click-Through Rate = 2.54%
  • Website Conversion Rate (From Ads) = 4.43%
  • Average Cost Per Purchase = $16
  • Required Return On Ad Spend = 2x
  • Average Order Value = $35

Once we’ve received campaign data, we compare current performance to what we’d have if we could reach a goal metric — like seeing how much we’d increase sales by improving content quality that drives a higher CTR of 3.30% instead of 2.54%.

We use this calculator to project the performance of campaigns needed to reach our goals. For example, if our client’s looking to generate $600k from paid ads this year but doesn’t know the cost or projected profitability, using the calculator is a great place to start.

A visual representation

By using data from past campaign performance, we’re able to project our daily, monthly, and annual performance. While these numbers are never going to have 100% precision, they can help you determine if your goals are realistic.

So before you start a new campaign or try to meet an unchecked annual performance goal, be sure to create projections first using historical data. This will give you the clarity and confidence needed to make intelligent business decisions.

Try the calculator tool.

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