Deciding How Much to Spend on Advertising

We talked about when to expect results from advertising in another blog post, which is one of the most frequently asked questions anyone who works at an agency will hear. In this post, we’re getting more practical and digging into the obvious question clients have before getting started:

“How much should we spend?”

The short answer is “it depends”.

That’s undoubtedly the most frequently used answer in our field, by the way. It’s not a deflection, and there’s a good reason why it’s especially true in this case.

We’re actually going to show you how to come up with tangible numbers for budgets and results based on data using a calculation, and we'll approach it from two different angles:

A) Start with a budget and forecast an outcome using estimated KPIs

B) Start with a target outcome and work backwards to determine a budget

For this example, we’ll say a conversion is an email lead from your website, and that's the outcome we're going for, to keep it simple. We start by defining the variables which are:

• CPM, the cost per thousand impressions, which gets the ball rolling when we pay for ads to show

• CTR, the click-through rate, which is the percentage of ad impressions that get clicked

• Conversion rate, which is the percentage of clicks that turn into leads

Impression-based bidding is often used on ad platforms such as Meta and Spotify, and we'll use it for this example. Search campaigns, such as those on Google, differ in that we bid on the click instead of the impression, therefore we would use CPC (cost-per-click) for forecasting, and simply adjust the calculation to use that metric and carry on the same way.

The wildcard here is how accurate the variables are. We won't know the CPM and CTR for sure before launching, but they can be estimated using our own benchmarks derived by working with other similar clients & campaigns. Likewise with an estimated conversion rate, though different websites can vary wildly, so ideally you would have some historical data of your website's actual conversion rate which we could use for the calculation.

Enough Talk, Let's Do Math

We'll use some hypothetical numbers for the variables:

• CPM of $16

• CTR of 2%

• Conversion rate of 4%

Let's forecast the outcome with a budget of $5,000. We plug these numbers into a step-by-step calculation, starting from the top and working our way down:

Budget	$5,000	Amount to spend on ads
CPM	$16	Variable
Impressions	312,500	Calculated by: (Budget / CPM) x 1,000
CTR	2%	Variable
Clicks	6,250	Calculated by: Impressions x CTR
Conversion Rate	4%	Variable
Conversions	250	Calculated by: Clicks x Conversion Rate

Voila, forecasted results!

After we commence advertising, we check the real data to see if the variables are accurate and adjust them as needed for future calculation. Then, if we want to forecast with a different budget, we simply plug that number in to see what we'll get.

Let’s also flip it over for other method of starting with an outcome and working backwards, and this time we’ll get more aggressive and see how much it increases the budget required to make it happen. We’ll use the same variables, but instead of starting with a budget, we’ll say we want 300 leads and want to know how much to spend to accomplish that:

Conversions	300	Amount of leads targeted
Conversion Rate	4%	Variable
Clicks	7,500	Calculated by: Conversions / Conversion Rate
CTR	2%	Variable
Impressions	375,000	Calculated by: Clicks / CTR
CPM	$16	Variable
Budget	$6,000	Calculated by: (Impressions / 1,000) x CPM

Predictions are not guarantees of course, and the assumption is that the variables stay unchanged as we scale, but they do offer a reasonable idea of what to spend based on data, which is more useful than a guess based on gut feel.

This can even go further, adding on profit metrics such as ROI, provided you know your average lead closing rate and revenue per sale. The process is the same, including in reverse if you wanted to start with a target profit and work backwards to determine a budget.

It’s also worth repeating that if you don’t have a record of your website’s historical conversion rate, you really should, and we help all of our clients set up Google Analytics complete with event tagging which would accomplish that (we talk about the importance of tagging events properly here).

Data is our friend; the more accurate data we have, the more informed our forecasts will be.

So What?

Budgets can be difficult to talk about. Some people find them arbitrary or restrictive, setting boundaries prematurely when circumstances could change. Others feel like they have to “hide their cards” and not give up more than they need to, resulting in not being forthcoming and open to possibility.

In our world, adapting to change and transparency of data are central to how we operate. We want our clients fully informed of what’s going on with their campaigns, and not hesitating to ask questions.

It’s not intended to be an overwhelming data dump either. With every KPI we report on, behind it there is a “so what” factor (just like our blogs). Is it good, is it bad, why are we pointing it out, and so on.

Data is a major advantage that digital advertising has over traditional media. There is so much data available, however, that sometimes people don’t know what to look for or how to put a plan together.

That’s what we do. Digital advertising is largely a numbers game, and we’re good at it.