What Budget Should I Set for Online Advertising?
Once you have decided to take the plunge to test online advertising, the next question is, “What budget should I set for online advertising?”
For first time advertisers, here are a few important guidelines to follow in the planning phase:
︎︎︎01 Determine sufficient length of test, so there is time to collect statistically significant results data and iterate on the approach.
︎︎︎02 Calculate budget using cost-per-goal (or price-per-sale).
︎︎︎03 Define reasonable benchmarks.
Conduct a Sufficiently Long Test
The typical testing period is 3 months, adjusted for sales cycle, as to give enough time for statistically valid testing and to iterate on the initial strategy.
Time is needed to test one variable at a time. Many wonder, “If we increased the budget significantly, could we speed up the testing process?” While a larger budget does make it possible to test tactics faster, it can also make the test innately more risky. A test starts off with a set of hypotheses and the more unproven hypotheses we are running in parallel, the more likely we will be inefficient with the spend, but we will conclude which aspects of the campaign are working well and which need improvement more quickly.
It is important to consider your sales cycle. If:
︎︎︎Your average sales cycle takes more than a month, then a 3 month test is likely too short as it will be difficult to confirm sales data and the return on investment for the campaigns in this tight time frame.
︎︎︎Your sales cycle is a week or shorter, then even a one month test could work to provide a lot of great data for your business.
Being too aggressive with your initial budget is almost always wasteful as it takes time to interpret results and to then act on them to improve performance. If you had $1 million to spend on online ads, but only three days to spend it, there are only so many updates or tweaks you would be able to make on such a short time frame. Most online advertising systems have a reporting delay between when your budget is spent and when you can see and act on the results adding to the challenge.
︎Being too aggressive with your initial budget is almost always wasteful as it takes time to interpret results and to then act on them to improve performance.
You might be able to make 2-3 major updates (e.g. shifting around budget, changing tactics, adjusting your creative strategy) during that time frame, but very likely, you would end up wasting a huge portion of your budget on poor performing tactics resulting in subpar performance.
On the other hand, if you had 30 days in which to spend $1 million, you would be able to get regular feedback on what is working and make updates consistently. By the end of your test, you might have made as many as 20-30 major changes to your strategy, and as a result, you would end up with much stronger performance than in your 3-day test.
The chart below shows the cost-per-goal of a 3-day test of $1 million (where 3 larger optimizations were made) vs. the cost-per-goal of a 30-day test with a budget of $1 million (where close to 30 smaller optimizations were made). By this example, in a 30-day test, almost 2/3rd’s of your budget would garner cost-per-goal’s below your best cost-per-goal in a 3 day test. It’s always best to start a bit more conservatively and then to ramp up campaign budgets once they have shown clear signs of profitability.
As the graph shows, with less time to optimize, the average cost-per-goal in a 3 day test (blue line), will always be higher than the cost-per-goal in a 30-day test (pink line).
Use Your Cost-Per-Goal to Determine Your Total Budget
It is important to keep in mind that there is no single ‘correct budget’ number to use for your online ad tests, and that the number you end up with should factor in your cost-per-goal. At a minimum, we would recommend a budget of cost-per-goal * 50 (or an absolute minimum of cost-per-goal * 30). If you don’t currently have a goal or a cost-per-goal, use your price-per-sale instead (e.g. if you sell a $50 product, use $50 as your cost-per-goal). So, with a $50 cost-per-goal, you ideally have a minimum test budget of $2.5k over the course of your test. If your product is $100, that’s a minimum of a $5k budget over the course of your test. This is illustrated in the following table:
Again, there is no single ‘correct budget’ number to use, but rather, the larger the budget you select, the greater the likelihood that your results are accurate and are not skewed by chance. For example, if you had a $100 product, ran $300 in ad spend, and made $400 in revenue, you might use this as proof that your online advertising strategy was effective.
Realistically, this is such a small sample size, that if you tried to scale your campaign, you might quickly find that you got lucky initially and that your current strategy is significantly unprofitable. Alternatively, had you spent $30k in ad spend as a test, whatever results you got would likely be very accurate in terms of predicting how you will perform long-term.
Set Reasonable Benchmarks
It’s not a test without a goal. A goal must be set before campaigns begin so there is a clear understanding of what can be concluded as ‘success’. There are a couple ways that you can set benchmarks for your test:
︎︎︎01 Return-on-Investment (ROI): The best benchmark for measuring marketing campaigns is return-on-investment. For example, if your product costs $50, and you know that your profit margin is 75%, then you could set your goal for the advertising test as a cost-per-sale of $37.50 or better. The goal here is to hit at least 100% ROI, with the hope that further improvements can be made to improve the profitability further over time, or that these customers may eventually buy from you again, or refer new customers your way. ROI-positive campaigns should always be the primary goal and this measure works well even when your price point is variable.
︎︎︎02 Exceeding Past Performance: If you have run online advertising before, and are working with a new partner, it is often best to use past performance as your benchmark and to see if you are able to beat it with this new test. Alternatively, if you are testing a new channel, it can often make sense to judge performance off the previous channel (e.g. if you have only run Facebook ads in the past, and want to do a Google Ads test, use your Facebook ads performance as your performance benchmark).
One final thing to mention: a good rule of thumb is that after your test, if you break-even in terms of profitability, then you can expect to be successful long-term.
If after your test, you haven’t achieved profitability or you fell short of your goal, this doesn’t necessarily mean that you won’t see long-term success. If you are within 10% (or even 20%) of your goal, you will likely hit your target with a bit more time and effort.
If you missed your goal by a substantial amount, then it might be worth considering an entirely new strategy and to see how results for this strategy compare with your initial test.
When it comes to scoping a marketing test, it’s a matter of both time and money. Each variable must be chosen appropriately given your business, its sales cycle, and its average cost-per-goal. If you’d like to discuss testing online advertising for your business or if you’re interested in seeing if we can exceed your past performance benchmarks, please contact us at firstname.lastname@example.org and we would be delighted to discuss.
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