How to Determine a Digital Advertising Budget

In today’s marketing environment, a digital advertising budget should be included in every small business’s marketing strategy. Yes, it’s a marketing expense, but the benefits of digital advertising (done correctly) will provide a return on investment.

But how do you determine what to spend every month? We’ve put together a step-by-step guide to help you determine your monthly or annual digital ad spending.

Advertising Platforms

Before we dive into the nitty-gritty, it’s important to determine what social media channels and advertising platforms you’ll use. The marketing channels you use to execute your advertising strategy should be the platforms your target audience frequently uses. These might include:

• Google search
• Facebook and Instagram
• TikTok
• YouTube
• Pinterest
• Yelp
• Tripadvisor

Type of advertising

You should also consider the type of ads you’ll run based on the outcome you hope to achieve. The most common digital media ads are:

• Google search and display ads
• Video views
• Social media ads (content marketing, click-through and lead generation, etc).
• Click-to-call ads
• Brand awareness
• Lead generation

Determining a Digital Advertising Budget

Believe it or not, there are formulas to help you determine your digital marketing investment. These formulas can provide insight into how much you should invest based on your desired outcome. The formulas below are focused on service-based industries like mortgage and real estate.

Note that you’re going to have to run ads for at least 60 days to have the data needed to execute steps 3 and 4 below. During your first 60 days of advertising, we recommend a minimum budget of $250 to $500 per platform.

Step #1: Identify your annual revenue goal

The first step in determining your digital ad spend is to identify your revenue goal. What’s your annual revenue goal, and what does that average out to monthly? Keep that monthly revenue goal in mind, because you’ll need it in the next section.

During this process, it’s a good idea to identify the marketing channels you’ll use to help meet that goal. While digital advertising can be very lucrative, it should never be your only source of business, especially when you’re starting out.

Step #2: Sales/deals closed per month

Once you’ve identified your revenue goals, it’s time to determine how many deals you need to close each month to reach that goal. This is determined by taking your monthly revenue goal and dividing it by your average commission or gross profit per deal. This equals the number of deals you need to close each month.

THE EQUATION: Monthly revenue goal / average commission per deal = number of sales you need to close each month

Step #3: Understand your conversion rate

You have now established your revenue goals and know how many deals you need to close. The next step is determining how many leads you need to acquire in order to close X deals each month.

Digital advertising conversion rates often differ from those of other marketing channels. If you’re using a general conversion rate that applies to your collective sales and marketing efforts to help determine a starting budget, you should reassess it after 60 to 90 days of running digital ads. You should be able to determine a conversion rate on your own digital advertising efforts at that time.

THE EQUATION: number of sales each month / average conversion rate × 100 = number of leads you need to generate per month

Service-based businesses typically have longer sales cycles than product-based businesses. With a service like getting a mortgage, a lead may come in and not close for 12 to 18 months. Implementing a lead tracking and ranking system is crucial to determining your return on investment (ROI) and actual conversion rate.

Step #4: Establish your monthly digital advertising budget

Next you’ll want to establish your monthly ad spend. This is where all the formulas above come into play. At this point, you’ve run ads for 60 to 90 days and have a general understanding of your conversion rate from those ads. You will also need to know your average cost per lead.

THE EQUATION: number of leads you need to generate × cost per lead = estimated monthly ad spend

The Importance of Understanding ROI

The formulas shared above, along with a lead tracking and ranking system, will help you better understand your return on investment. It’s not uncommon for small businesses to invest in digital advertising and have no idea what their ROI is. The problem with not understanding your ROI is that you never really know whether your actions are working.

Using simple business metrics can help you establish a baseline digital advertising budget. Once your campaigns have been running for a while, you’ll have enough data to hone in on what’s working and establish a budget for continued success.

If your business needs help with digital advertising, click here to book a complimentary consultation with our team today. We are an end-to-end boutique digital marketing agency that can help you in all areas of your marketing, including your digital footprint and paid media.