How Much You Should Spend on Advertising Your Business

There are a number of simple formulas and strategies you can employ to make sure your growing your business as quickly as possible without breaking the bank. The reason it’s so important to pick the right small business advertising budget is that if you allocate too little then you could find out you don’t have enough customers at the end of the year because you’ve missed your targets. Allocate too much and you may put too much strain on your cash flow or take on more business than you can service.

Start With A Known Sales Objective To Determine Your Small Business Advertising Budget

Let’s look at a simple example of an accounting firm looking to pick up small business clients. They decide that a reasonable number of new clients to take on would be about 2 per month to achieve their growth objectives this year.

With that in mind they then look at their typical conversion rate from an inquiry they receive to doing business with them. Let’s say they typically convert 20% of the people who approached them ‘cold’ – ie without being referred to them by a trusted third party (eg referral from a client or solicitor). They discuss with their marketing agency how much it’s likely to cost per lead, and let’s say the agency expects that in that town a typical lead will cost around $35 to generate through advertising on Facebook (just for this example), including the advertising and the agency’s time. There will be an additional fee of 500 dollars for the creative for the project (that would include photographs, copy and some hand drawn artwork).

For the purposes of this example we’ll assume they are a small business accountant and typical annual fees for their clients are $1,000. We’ll also assume that to keep things ‘fresh’ they’ll invest in new creative every 3 months. Let’s also assume that their conversion rate isn’t as good as before because many of these new customers will be discovering their brand for the first time so let’s assume it’s half at 10%. Let’s also assume that for the first 3 months they are don’t start to sign the clients immediately because there is usually a 3 month lead time before prospects become clients so we’re only going to count profit for 9 months of the year.

Leads Required = Sales Required / Conversion%

==> Leads Required = 2 / 0.1 [ 0.1 = 10% ]

==> Leads Required = 20

From that simple calculation we can then work out the annual profit they can realistically expect to make from this new advertising campaign.

New Clients = 2 x 9 = 18 for the year.

Advertising Cost = 20 leads x $35 lead cost x 12 months = $8400

So let’s lay it all out in a simple table:
[table class=”table_blue”]

Creative Cost $ Advertising Cost $ Total Cost $ Total Income $ Surplus $
2000 8400 10400 18000 7600

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In our example the accounting firm makes additional revenue after advertising cost $7,600. However it’s clear that they will usually keep their clients for more than one year. So even if it cost the full $7,600 to service those new clients in the first year they would expect to make an additional $24,000 of revenue from these new clients for as long as they typically hold clients, which for many would be several years, making this an extremely profitable advertising campaign, despite the very conservative conversion rate we used.

The beauty of this kind of strategic online marketing and advertising for clients is that small businesses don’t have to bear any long term risk. The owner can see clearly whether enough leads are being generated, whether they are being converted at an acceptable rate, and monitor that as regularly as they desire.

The expected profit from the campaign can be constantly updated with the real figures, in real time, which is a revolution for businesses compared with old-fashioned advertising in yellow pages and local media outlets where ROI is notoriously difficult to monitor.

Naturally we’d be happy to help you calculate the costs and opportunities for your business – drop me a line anytime on team@pallado.us and I’ll help you fill in your own advertising profit table to see if it makes sense for your business.

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