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Calculating Your Advertising Budget: A First-Time Advertiser's Guide

November 16, 2017 at 5:11 PM

As a small business, a dollar saved is a dollar earned. A dollar invested, however, may just the key to growing your business.

Investing in paid advertising can be the quickest and most effective way to drive sales for your business. In a manner of hours, you can get in front of thousands of potential customers and start driving more qualified traffic to your website or location. Or, you can get your ad in front of anyone searching for businesses in your area, immediately catapulting your listing above those of your competitors, no matter how big or how established they are.

At the same time, paid advertising remains an enigmatic channel for many small businesses. Unlike traditional business expenses sold at a fixed price, you name the price you want to pay for your digital advertisements.

With advertising, you only pay for performance. In the classic pay-per-click (PPC) model for paid advertising, advertisers are charged each time someone clicks on their ad. Setting a budget of $20 a day might get you 10 clicks, while doubling that budget will net you double the clicks. The larger your budget, the greater the results.

Of course, money doesn’t grow on trees and, at some point, your advertising may start to see diminishing returns. Finding the right balance between ad spend and results can be a challenging task, especially if you’re just testing the waters with advertising, but we’re here to help you land on a budget that works for your business.

In this guide, we’ll walk you through what it means to think of advertising as an investment, how to set budget for your first paid advertising campaign and how to ensure a positive return on your advertising spend.


Budgeting for PPC Advertising

Thinking of advertising as an investment

Often, marketing and advertising teams get a bad rap. They’re seen as cost centers, racking up operational costs without a clear impact on profitability and revenue growth.

Online advertising is different for two reasons:

1) Everything is tied to performance. In a pay-per-click model, you only pay for results. If no one engages with your ad, you won’t be charged a dime.

2) It’s been proven time and time again. There’s a reason why the online advertising market is worth almost $600 billion: It works. According to recent studies:

  • The average business makes $2 in revenue for every $1 they invest in paid advertising through AdWords (Google’s Economic Impact Report)
  • 65% of marketers plan to increase their digital advertising budgets in the coming year  after seeing a strong ROI (Gartner’s 2017 CMO Survey)
  • Retargeted visitors are 70% more likely to return to your store or website (Criteo)
  • 78% of local-mobile searches result in offline purchases (comScore)

Of course, each business will see a different return on its advertising investment, but we’ve included a few tips to maximize your ROI later in this guide.

 

ads overwhelming

Setting your initial digital advertising budget: Start low

While you can set a budget as low, or as high, as you’d like, we generally recommend starting on the smaller side—big enough to get some benchmark data on whether or not your campaign is working, but small enough to minimize your potential risk.

In general, we’d recommend budgeting for a minimum of ten daily clicks for the duration of at least one week. While you can opt to budget for a lesser number of clicks, we’ve found that this target will get you the initial data you need to forecast and optimize your future digital advertising. Additionally, most networks take a few days to approve your ads and start raking in clicks and impressions, so the one-week minimum will make sure your campaign is fully up and running.

While you can always reduce your budget after your initial trial with paid advertising, we’d recommend waiting until achieving the statistical significance that comes with 70 clicks over the course of a week before making any changes to your keywords, ad copy, or budget that will reset your campaign’s learning phase. At this point, you’ll also have a better idea of which keywords or targeting options work (and which don’t), allowing you to refine your campaigns with reliable data instead of the one-off anecdotes associated with smaller campaigns.

So how do you budget for clicks?

Take the average cost of a click and multiply it by your daily click target (say, 10 clicks) and campaign duration (say, 7 days).

For Facebook, with an average cost-per-click of $1.72, you’re looking at a minimum budget of:

How to set a budget for Facebook advertising


For Google AdWords, with an average cost-per-click of $2.32, you’re looking at a minimum budget of:

How to set a budget for Google AdWords search advertising


While these numbers represent nation-wide averages, some businesses will see higher costs, with prices going up for more competitive industries and more niche target markets.

In a previous post, we identified a few industries with higher-than-average advertising costs, especially on the Google AdWords search network. If you’re in one of these industries, we’d recommend a larger initial budget to give your campaign the best possible shot at success:

Industry

Average keyword cost (AdWords)

Recommended targets*

Recommended weekly budget

Accounting / Finance

$10.64

3 daily clicks for seven days

$225

Automotive

$4.48

5 daily clicks for seven days

$160

Childcare

$4.22

5 daily clicks for seven days

$150

Healthcare

$3.88

6 daily clicks for seven days

$160

Dental

$7.58

3 daily clicks for seven days

$160

Education

$6.19

4 daily clicks for seven days

$180

Legal

$42.60

1 daily click for seven days

$300

Plumbing

$23.98

1 daily click for seven days

$170

*Consider first how many new customers or clients your business can take on. While we generally recommending budgeting for ten daily clicks, few small law firms, plumbers and other service businesses can support client growth at that scale. In these cases, budgeting for as little as one daily click may be sufficient.

Not ready to invest that large of a digital advertising budget? Budget for fewer daily clicks instead, or browse our keyword suggestions or use Google’s Keyword Planner to find keywords that fit within your budget.

Optimizing your paid digital advertising budget

Optimizing for profitability

After letting your initial campaign run for a minimum of seven days, you should have some interesting data points to help you evaluate whether or not online advertising makes sense for your business.

In general, as long as your perceived gain outweighs the cost of advertising and you have the capacity to support customer growth, we’d recommend investing more into your digital advertising efforts. Your perceived gain can come anecdotally (a new customer mentioned seeing your ad on Facebook), through brand awareness (your campaign reached 500 potential customers on AdWords) or from direct attribution (your ad can be tracked to $850 in new revenue).

While there’s no magic number for an ideal advertising budget, the U.S. Small Business Association recommends investing 7-8% of your total revenues into marketing and advertising:

As a general rule, small businesses with revenues less than $5 million should allocate 7-8 percent of their revenues to marketing. This budget should be split between 1) brand development costs (which includes all the channels you use to promote your brand such as your website, blogs, sales collateral, etc.), and 2) the costs of promoting your business (campaigns, advertising, events, etc.).

- U.S. Small Business Association

If, however, you aren’t seeing the results or are getting to the point where you can’t support a growing customer base, it may be a good idea to dial down your campaign to a more sustainable levelsay budgeting for five daily clicks instead of ten.

Either way, unless it’s clear that your ads aren’t working, we’d recommend leaving on some baseline ad spend to maintain brand awareness and continuously test your messaging and product offering.

Budgeting for Google AdWords

Learning by doing

While we hope this guide offered some helpful tips for thinking about your digital advertising budget, we encourage you to follow your instincts and do what’s right for your business. The power of paid advertising comes in its flexibilitythe flexibility to dial down spend in the busy seasons when you’re at capacity, the flexibility to pause keywords that prove overly expensive and the flexibility to set your own budget.

Over the first few days of running your campaign, you’ll start to see a clear picture of just how far your budget can go and how many new customers your business can support.

The rest is just fine-tuning.

 

Read more: 

The Basics of Google AdWords: How It Works and How to Use It to Advertise Your Business

How to Create a Successful Ad Campaign on Google AdWords

Facebook Ads or Google AdWords: Where Should You Be Advertising?

10 Reasons Why Google Rejected Your Ad

Suggested Keywords For Your Industry: Google AdWords for Small Business

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