How much should my small business spend on advertising?

How much should my small business spend on advertising?

Your sales have flatlined. You’ve hit up all your usual referral partners and happy customers for warm leads, but it’s not enough to hit your numbers. You come to the reluctant realization, yet again, that you need to start running ads to feed leads into your sales funnel. You ask yourself the usual question, “How much do I spend on this?”

Trying to figure out how much you should spend on web advertising is a stressful exercise for small businesses. You need to get your name out there and compete, but it’s not like you have a slush fund to burn. Every dollar you spend has to count.

The biggest stressor is that online ads can look too costly to be a viable option. You’ve probably either said or heard some variation of the following:

“I tried AdWords before but it’s so expensive; only the big guys could afford to pay that much for leads.”

“Facebook isn’t for us. We tested it once and ended up with just a bunch of clicks and no real leads”

“Most of our leads come from organic and direct visits, and those are free. Paying for traffic just can’t compete with that.”

This is where most small businesses find themselves stuck: in a frustrating cycle of testing, failing to get traction, failing to scale new leads, and then being forced back into more tests.

You’re never quite able to figure out how much you should spend on ads if you’re not able to see consistent results and measurable ROI in the first place.

You’re likely measuring your ad performance too narrowly

Think of how you buy services for your business. Do you click on a banner and immediately sign up? Probably not. So don’t expect that buying behavior to apply to your own ad campaigns and don’t measure your ROI on that limited of a basis.

When you’re searching for a vendor yourself, you’re going to check out a business multiple times before you decide to reach out and buy. The same is true with your customers, and clicking on your ad is likely one of a number of touchpoints in their buyer journey.

Here’s a typical example of how this works in the wild:

sales funnel

There’s actually a whole suite of analytics products dedicated to solving this issue of “multi-touch marketing attribution.” Don’t freak out; you don’t need to buy another tool in order to figure out how much you should spend on ads. Sure, those tools are impressive and they might make sense for you as you get more sophisticated, but there’s a more simple (and cost-effective) way to take a more holistic view of how your ads contribute to tangible results.

The metric you need to focus on is your “Blended Lead Cost”

Blended Lead Cost metrix

It’s myopic to view your paid and unpaid sources of traffic separately. As you see above, the customer journey is complex. A visitor who found you through an ad could easily come back and convert after multiple visits via direct or organic.

You need to measure your results as a product of all your marketing efforts.

A focus on blended lead costs helps solve the problem of “leads from ads are too expensive but I can’t scale my free, direct, and organic leads.” By focusing on the blended picture, you’re likely to find that as ad traffic goes up, overall traffic to your site goes up. This makes sense; you’re raising overall awareness of your brand.

For example, at Pronto we had a really hard time getting leads to convert from display banners, so we decided to test a reduction in banner traffic. Lo-and-behold, pretty soon we saw a marked drop in leads from direct and organic. We hypothesized that banners were increasing the number of people seeing our brand and as a result, typing in our URL directly or company name into their search bar. So not only did we turn the display back on, we increased the budget to get more traffic and we soon found we got even more leads overall at a blended lead cost we could afford.

You’ll likely find that the blended lead cost is much more tolerable in terms of ROI, and as a result, you can actually commit more ad budget. When you are able to commit budget to ads consistently over time, you get the benefit of seeing trends and can optimize related channels. If you’re staying under your target blended lead cost, you have lots of room to test.

Here’s a free and easy way to measure your “Blended Lead Cost”

At Pronto, we call this the “Daily Pulse.” The Daily Pulse’s job is to track traffic, opt-ins from newsletters and ebooks, sales leads, and ad spend each day by traffic source or channel. Click on the cover to download the "Daily Pulse"

Blended Lead Cost metrix

Here’s how it works:

On the first tab, you have your paid sources of traffic and leads.

On the second tab, you have your unpaid sources of traffic and leads.

The third tab blends the sources together and produces a summary view of your online marketing performance. Your Blended Lead Rate is calculated as a rolling daily average.

Download the Daily Pulse and edit it to fit your business. You can update or add traffic sources or channels, and even change it to weekly versus daily if that’s easier for you.

Again, this is a stupid-simple way of approaching this challenge that has the offhand benefit of keeping our team really close to the numbers by inputting them each day. Google Analytics has this capability if you’re interested in taking the next step and instrumenting something fully automated.

How do you calculate a lead cost that will work for your business?

There are more and less scientific ways to do this. The quick and dirty approach is to ask yourself how much you’d be willing to spend if you could just buy a new customer off the shelf?” Take the amount you’d spend on buying a new customer and divide it by the number of leads it takes to close a deal. That’s your target lead cost.

This is what you’re measuring against and optimizing your marketing for in the Daily Pulse (awkward sentence structure). It works because advertising is just like buying customers. The only catch is it’s not as easy as picking one up off the shelf. Until then, hopefully the Daily Pulse helps make your digital marketing more informed and more effective.


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Pronto Marketing

Pronto Marketing

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