Advertising budget. Does a business need constants?
Do you often hear the phrase 'we don't have extra money for advertising'? There is no need to deceive yourself. The advertising budget is the basis for business development. The experience of successful companies shows that investment in advertising grows in proportion to the growth of the business. There are many nuances to this topic, but it is important for entrepreneurs to remember that when planning an advertising budget, they must understand the exact cost of each customer. New and 'old'. Otherwise, the business may find itself in a situation where targets are set but the business is not prepared to pay for them.
All marketing strategies converge at one point - customer acquisition and retention. Advertising is the primary tool used at all stages of the sales funnel. It is used to motivate, intrigue and drive decisions. Halla Systems Co. Ltd would like to talk to you today not about goals, sales funnels, reach, clicks, conversions and other elements of successful sales marketing, but about advertising budgets.
The advertising budget is a constant
Advertising costs should be planned in advance, taking into account the seasonality of the business when net profit is low or non-existent. The easiest way to do this is to set a clear and fixed percentage of turnover or gross profit. When calculating the percentage, take into account margins, turnover and competition in the niche. It could be 5-10% of total sales or 10-20% of gross profit.
Large online shops spend 20% of their turnover on advertising every month. That's a lot of money. But that's why they get seen, known and bought from.
How is your advertising budget growing?
Do you want to sell more? Then your advertising budget needs to grow. It's easy to calculate the amount needed, as long as you remember that the marketing budget is a constant.
But even if you increase your investment in advertising, there is no guarantee that the increase in the advertising budget will be proportional to the increase in sales. No one can cancel out market competition, changes in consumer demand. Another creative may not 'work'.
As a rule, advertising effectiveness and sales growth are not always linearly related to the size of the budget. As in any business, it takes a comprehensive approach to get results. Sometimes a more effective solution may be to optimise existing marketing strategies: changing or improving the quality of content, targeting, choosing the right advertising channels. It is important to systematically analyse marketing strategies that work. Test advertising ideas and creative.
Cost of acquiring a customer
To assess the effectiveness of advertising, its return on investment (ROI), you need to know and constantly monitor the cost of acquiring a customer. It is even better if you calculate the average cheque before starting an advertising campaign and use the margin to determine the acceptable cost of a customer. To estimate margin, determine how much of the revenue from the sale of a product or service will be net profit after deducting all variable costs.
Maximum customer value = average cheque x margin, this is the maximum amount a company can invest in acquiring a customer and still make a profit. It should be noted that it is not always possible to recoup costs immediately. In this case, repeat (expected) purchases are taken into account. Halla Systems' marketing experts recommend that when planning advertising costs, the budget for attracting a new customer should not exceed the gross profit on the first purchase. Don't spend more than you can earn from the first purchase!
Halla Systems recommends
Choose the main metric by which you will evaluate the success or failure of your advertising campaigns. The simplest and most straightforward way to evaluate the effectiveness of online shop advertising is to analyse sales for each product group and direction. When thinking about scaling, analysing your marketing strategy and calculating your advertising budget, start by setting goals: realistic, specific, measurable and time-bound.
