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How to Determine the Right Budget for Your Ad Campaigns: A Small Business Guide

Deciding how much to spend on advertising can be one of the most challenging decisions for small business owners. Spend too little, and your ads may not reach enough people to make an impact. Spend too much, and you risk burning through your budget without seeing a return on investment (ROI).

In this blog, we’ll break down how to determine the right amount to spend on ads, whether you’re using platforms like Google, Facebook, or LinkedIn. We’ll guide you through setting realistic goals, understanding key metrics, and making data-driven decisions to maximise your ad spend.

1. Start with Your Goals: What Do You Want to Achieve?

Before deciding on how much to spend on ads, it’s essential to define your goals. What are you hoping to achieve with your ad campaigns? Your advertising budget will vary significantly depending on your objectives.

Common ad campaign goals include:

  • Increasing website traffic: You may want to drive more people to your website to boost awareness or increase online sales.
  • Generating leads: You could be looking to capture contact information from potential customers for future follow-up.
  • Boosting sales: Your goal might be to convert prospects directly into paying customers through your ads.
  • Building brand awareness: You might aim to increase visibility and recognition of your brand, especially if your business is new or in a competitive market.

Pro Tip: The more specific your goal, the easier it will be to estimate how much you should spend to achieve it. For example, instead of simply aiming to “increase sales,” set a target of gaining “100 new customers in 30 days.”

2. Understand Your Customer Acquisition Cost (CAC)

Your Customer Acquisition Cost (CAC) is the amount you need to spend to acquire a single new customer. This is a critical metric in determining how much to allocate for ads. To calculate your CAC, divide the total amount spent on advertising by the number of customers generated from those ads.

CAC formula:

Screenshot 2024-10-04 at 11.02.20 PM

For example, if you spend £500 on ads and acquire 10 new customers, your CAC would be £50 per customer.

Why CAC matters:

  • If your average profit per customer is £100 and your CAC is £50, your ads are generating a positive return.
  • However, if your CAC is higher than your average profit per customer, you may need to optimise your ads or increase your budget to attract higher-value customers.

Knowing your CAC helps you set realistic expectations for your ad spend and determine how much you can afford to invest in acquiring new customers.

3. Set a Daily or Monthly Budget: Start Small and Scale Up

When you’re just starting out, it’s a good idea to set a small daily or monthly budget for your ads. This allows you to test the waters and gather data without risking a large portion of your marketing budget upfront.

How to set your budget:

  • For daily budgets: Most ad platforms like Google Ads or Facebook Ads allow you to set a daily budget. You can start with as little as £5 to £20 per day, depending on your overall marketing budget and goals.
  • For monthly budgets: If you prefer to control costs over the long term, set a monthly budget based on what you’re comfortable spending. For example, if you set a monthly ad budget of £600, your daily spend would average around £20.

Pro Tip: It’s better to start small and increase your budget once you have a clearer understanding of what works. As you gain more data, you can scale up your budget based on what’s generating the best results.

4. Know the Cost-Per-Click (CPC) and Cost-Per-Lead (CPL) in Your Industry

Understanding the average Cost-Per-Click (CPC) and Cost-Per-Lead (CPL) in your industry can help you set realistic expectations for your ad spend. CPC refers to how much you’ll pay every time someone clicks on your ad, while CPL refers to how much it costs to generate a new lead.

How to find industry benchmarks:

  • Use tools like Google Keyword Planner to estimate the average CPC for keywords related to your business.
  • Research industry reports to find average CPLs for your sector, as these can vary widely based on factors like competition, industry, and the target audience.

Example: For a B2B business, the average CPL might be higher (£50 to £150), while for a B2C business, the CPL could be lower (£10 to £50). Knowing these figures can help you allocate your ad budget more effectively.

5. Monitor and Optimise: Track Results and Adjust Your Budget

Once your ads are up and running, the key to maximising your ad spend is ongoing monitoring and optimisation. Track your campaign’s performance and adjust your budget based on the results you’re seeing.

Key metrics to monitor:

  • Click-through rate (CTR): The percentage of people who click on your ad after seeing it. A higher CTR means your ad is resonating with your audience.
  • Conversion rate: The percentage of people who complete a desired action (e.g., make a purchase or sign up for a newsletter) after clicking on your ad.
  • Return on ad spend (ROAS): This measures how much revenue you generate for every pound spent on ads. A ROAS of 3:1, for example, means you earn £3 for every £1 spent on ads.

Pro Tip: If certain campaigns are performing well, consider increasing the budget for those specific ads to maximise your return. On the flip side, if a campaign isn’t delivering results, tweak the targeting, messaging, or ad format before deciding to increase or decrease your budget.

6. Allocate Budget Across Different Platforms

If you’re using multiple advertising platforms (such as Google Ads, Facebook Ads, and LinkedIn Ads), consider how to allocate your budget across each platform. Some platforms may generate better results depending on your target audience, industry, and campaign goals.

Platform considerations:

  • Google Ads: Best for search-driven ads, especially if you want to target people actively searching for your product or service.
  • Facebook and Instagram Ads: Ideal for targeting based on interests, demographics, and behaviours. Great for brand awareness and engagement campaigns.
  • LinkedIn Ads: Best for B2B businesses looking to reach decision-makers and professionals in specific industries.

Pro Tip: Start by testing different platforms with a small portion of your budget, then allocate more spend to the platforms delivering the best results.

7. Consider a Percentage of Revenue Approach

Many small businesses choose to allocate a percentage of their overall revenue to marketing and advertising. As a general rule of thumb, small businesses often spend between 5-10% of their annual revenue on marketing, which includes advertising costs.

Percentage-based approach:

  • If your business generates £100,000 in annual revenue and you decide to allocate 7% to marketing, your marketing budget would be £7,000 per year.
  • You could then allocate a portion of this budget to advertising, depending on your other marketing needs (e.g., content creation, email marketing, etc.).

This method ensures that your ad spend is proportionate to your business size and revenue, allowing for sustainable growth.

Finding the Right Ad Budget for Your Small Business

Determining how much to spend on ads doesn’t have to be complicated. By starting with your goals, calculating your customer acquisition cost, and understanding key industry benchmarks, you can set a budget that fits your business and maximises your return on investment.

Remember, the key to success is testing, tracking, and optimising. Start small, gather data, and adjust your budget based on the results you’re seeing. With a well-planned ad spend, you can effectively reach your target audience, generate leads, and grow your small business.

Need help creating an ad strategy for your small business? Get in touch for expert advice on budgeting, targeting, and optimising your campaigns!