How Much You Should Spend on Digital Advertising in 2022

If you came to this page expecting to read anything along, “If you spend $1,000 on digital advertising each month, you’ll easily meet your marketing objectives!”. There is no ideal solution for every organization regarding ad investment. It may seem like a cop-out, but believe me when I say it’s true.

You could be asking yourself, “Why am I even reading this post?”

While I can’t tell you how much money you should spend on digital advertisements this year, I can guide you through a framework that will help you figure out what’s best for you.

Finally, consider the following factors when determining how much you should spend on digital advertising:

How much money will I need to reach my income targets?
What is the maximum proportion of my marketing budget that I can spend?
What is the typical customer’s lifetime value (LTV)?
How successfully am I converting visitors to leads and buyers on my website?
What is the total cost of each bid?

By the conclusion of this article, you’ll know how to utilize historical data to figure out how much money you’ll need to meet your company objectives and maximize your efforts to get the most bang for your buck. Does it make sense? Let’s get started.

1. What level of investment is required to meet revenue targets?

Most firms’ principal objective is to produce long-term sustainable revenue growth. As a result, you should work backward from your company’s revenue objectives when choosing how much to spend on digital advertising.

Working backward may help you figure out how much income your digital advertising generates, which can help you figure out how much money you’ll need to make that aim a reality.

Here’s an example of what this may look like:

It all begins with your company’s aim, which is likely to be more revenue. Many departments, including marketing, sales, and customer support, will collaborate to accomplish this ultimate aim. You can figure out what proportion of income each department can contribute by looking at previous performance throughout your company.

You’ll have many goals inside marketing that feed into marketing’s responsibilities, such as paid, owned, and earned objectives. To support this corporate aim, you’ll undertake various efforts, including paid advertising ads.

Let’s look at an example to comprehend this notion better. Let’s imagine your company’s aim for this year is to increase sales by $100,000. The company assigns 50 percent of the objective to the marketing department based on past success. So, what efforts are you planning to conduct to generate $50,000 in revenue?

Well, digital advertisements will be only one of several strategies you use, all of which will need expenditure. You know that your average return on ad spend is $2.50 based on the past success of your ad campaigns. This implies that for every $1 spent on advertising, you will earn $2.50.

If you believe your previous marketing initiatives on owned and earned channels may influence 75% of marketing’s ultimate target, that leaves 25%, or $12,500, for you to reach with advertisements. When you multiply this by your $2.50 ROAS, you’ll discover that you’ll need to spend $5,000 over the year to meet your revenue targets.

2. What is the maximum proportion of your marketing budget that you may spend?

Do you have $5,000 to spend on digital advertisements right now? If you do, extraordinary; your current advertising plan will allow you to maintain long-term income growth. However, I wouldn’t be shocked if many of you don’t have the necessary advertising budget to have the desired effect.

Or if you’re new to digital advertising and don’t have any past data on ad spend and return on investment to guide your choice. So, what do you do now?

It’s a tricky question to answer honestly, but you must first ask yourself, “How much money do I truly have?” Then, examine your cash flow and earnings to determine how much money you have available for digital advertising investment.

If you establish a budget that you can’t afford, your campaigns’ long-term performance and development are doomed. That’s why it’s crucial, to begin with, a budget that you’re happy with and can stick to in the long term.

But don’t worry: just because you’re on a tight budget doesn’t mean you can’t employ sponsored media as part of your overall marketing strategy. Finally, before diving into advertisements, you should improve other company KPIs to get the most bang for your buck with every ad dollar spent.

3. What is the typical customer’s lifetime value (LTV)?

A projection of the profit attributable to the whole future relationship with a client is called lifetime value. Simply defined, LTV tells you how much money you’ll generate over time from a single consumer.

To calculate LTV, multiply the average annual income your typical client generates by the average customer longevity.

For instance, if your typical client pays you $500 per year and remains with you for six years, we can conclude that their average lifetime value is $3,000. But don’t forget about the expense of servicing a client. When you consider that servicing that client costs $50 per year or $300 throughout their lifetime as a customer, the average lifetime value of your customers is $3,000 minus $300, or $2,700.

The better your client’s lifetime value is, the more money you may spend on acquiring a new customer. Consider increasing your customer’s lifetime value (LTV) if you’re short on advertising funds.

In this post, I won’t go into depth about all of the recommended practices for enhancing client lifetime value. First, however, consider your company’s subscription and price structures to get you started. Launching marketing strategies to increase LTV will make your digital advertisements more effective and less expensive.

4. How successfully do you convert visitors to leads and leads to consumers on your website?

Now that you know your customers’ average lifetime value, you can work backward to determine your monthly advertising budget. We’ll work through this example, emphasizing the importance of a form conversion, but you can use the same strategy to optimize your advertising for any conversion point.

When determining your advertising budget, keep the following in mind:

Your average conversion rate is the percentage of visitors that fill out a form and become a lead on your website.

The average lead-to-customer rate is the rate at which leads become paying customers (your average lead-to-customer rate).

Imagine you own an IT consulting firm and want to promote your next network security webinar. You investigate the success of your previous webinar landing pages and discover that your webinar conversion rate is 7% and your lead-to-customer rate is 10%. So, if ten individuals register for your webinar, one of them is likely to become a paying client.

What are the figures for your company? Do they fall short of your expectations? If that’s the case, your ad expenditures aren’t being used as effectively as they may be. Consider testing your calls-to-action and using social proofing to boost your landing page conversion rate.

You may also utilize email automation to nurture your prospective consumers toward completing a purchase to convert more leads into customers. You can do a lot here, but for this exercise, just remember that if your conversion rates are poor, putting additional money into failing advertising isn’t the most important use of your resources.

5. What is the average amount of money you spend on each bid?

You should bid less than your projected return to get the most out of your marketing budget. Using this calculation, you can determine your maximum bid based on your LTV, conversion rate, and lead-to-customer rate.

LTV x Conversion Rate x Lead-to-Customer Rate = Maximum Ad Spend

To see this in action, let’s return to our webinar example. If you split one new customer by your lead-to-customer rate, you’ll notice one new customer requires ten webinar signups.

Next, multiply the required number of webinar registrations by the average conversion rate. Using our 7% webinar conversion rate, we calculate that 143 hits on your ad are needed to acquire one new client. Therefore, we can calculate how much you should pay for every click on your advertising if that consumer is worth $2,700.

Your break-even bid would be your customer lifetime value divided by 143. The number of clicks required to produce one new client, assuming all other expenses of obtaining a new customer were disregarded. This implies you might break even by bidding $19 per click on your ad.

For previous ad campaigns, repeat the procedure. Were you putting in too much of a bid? If you were, your advertising spend wasn’t being put to good use to meet your revenue targets.

Improving your ad wording, keyword approach, targeting, and other factors all impact how much you spend. Another helpful blog article on optimizing your digital advertising expenditures may be found here.

Rethink your spending to get the most bang for your buck.

Your advertising budget should be flexible enough to adapt to your company’s changing needs over time. When it comes to reevaluating your spending, having an experimental attitude can help you uncover the most lucrative projects in your plan and modify the way you budget.

It’s also worth remembering that there are many free, organic chances to boost company visibility and revenue on social media. Finally, a word of advice: I’d suggest reevaluating your spending no more than once every three months. That way, your campaigns will have enough time to provide consistent results while still giving you the time to change your investment to achieve your end-of-year objectives.

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