Do you use Facebook advertising for your business?
Setting the correct budget can be the difference between over spending with no results (like this) and outstanding ROI with real business growth (like this).
In this article you’ll learn how we approach the ad budget question for our business and what we recommend our clients do as well.
Before we get into it we need to make sure you have the right attitude towards marketing.
Your attitude towards marketing is directly correlated with the success of your business. Some business owners still hold the outdated idea that marketing is an expense that needs to be minimized in order to be profitable.
How do you determine how much you should invest in your Facebook advertising campaign?
Fist up you need your Customer Lifetime Value (CLV) figure to hand.
Let’s say you’re a local service business that’s advertising a free consultation. You convert 1 in 5 consultation leads into a customer, so you have a 20% conversion rate.
I should make it clear that your conversion rate doesn’t really matter for this exercise.
[One of our clients will only work with the very top end of their market and as a result they convert closer to 5%.]
Back to the example, we know you need 5 leads to generate 1 customer. But how much are you willing to pay to acquire a customer? This is a question that you have to answer about your own business.
Our example business, has a Customer Lifetime Value is £1,000 and on average £250 of that is billed right away. With these figures, most small business owners will ignore the Customer Lifetime Value and just see the £250.
Therefore, they’ll likely conclude that they can afford to spend £50 or so to acquire a new customer.
This is very short sighted.
Our example business should be happy to pay closer to £250 to acquire that customer.
[Please do not follow this blindly]
With a cost per customer acquisition this high, you will be making a loss upfront, so you need to have the cash to do this and you need to have healthy enough margins for this to work. This is exactly how we operate, as it allows us to buy more traffic than our competitors, stay in the winning positive ROI “zone” and in the long run is very profitable.
A bit of simple maths tells us that if they’re willing to pay £250 to acquire a customer and they convert 1 in 5 then they’re willing to pay up to £50 per lead.
To calculate their starting monthly ad budget we also need to know what their customer target is each month. This obviously depends on a number of factors and will vary massively.
One of our clients is delighted with just one new customer each month, whereas others require 20+. For our example we’ll say they want 3 new clients per month. That means they need to generate 15 leads per month.
Therefore, we would set their starting ad budget at:
Their required cost per lead (£50) x their required number of leads (15)
So their starting monthly ad budget would be £750.
Making those calculations is fairly simple. I’m sure you’ve done that before.
They launch a new Facebook advertising campaign and when it hasn’t delivered a high quality lead after they’ve spent £50 they stop it and come to the conclusion that it doesn’t work.
When you first launch a Facebook advertising campaign you should just be testing the strategy. It doesn’t need to deliver profitable leads from day one, you just want to prove that it can actually generate leads.
Continuing with our example, if £750 generates 10 leads in the first month (£75 per lead), it’s not time to throw in the towel.
An initial cost per lead of £75 is perfectly acceptable…
Because after they’ve split tested ads, targeting options, ad placement, the landing page on their website, etc.
I’d expect them to have cost per lead comfortably below £50.
Whenever we test a new Facebook advertising strategy for our business we’ll spend twice what we’re willing to pay per lead, with no results, before we go back to the drawing board.
Of course it is possible to launch a Facebook ad campaign that generates leads and sales very profitably from day one, and we do it for our clients all the time. But, you shouldn’t be discouraged if everything isn’t perfect right from the start.
Like most things, you need to stay in the game long enough to win it.
There you have it, a simple way to determine how much you should invest in your Facebook advertising.
If you are completely new to Facebook advertising and don’t have data such as conversion rates, we advise our small business clients to start with just £20-30 per day (£600-900 per month) which is the minimum required to split test targeting and placement at the Ad Set level.
Please share your thoughts in the comments below or tweet me @charlielawrance.
Charlie Lawrance is the Founder and CEO of Gecko Squared, a digital marketing agency that specialises in Facebook advertising. His clients include eCommerce companies, professional service businesses and best-selling authors. Stay in touch by liking his Facebook Page (Charlie Lawrance).