Guest Blogger Brian Wulfe Talks about Top 5 Factors that Determine a Startup’s Internet Advertising Budget
At Effective Spend we work with startups and established businesses alike to improve the effectiveness of their internet advertising campaigns. A common question that we get from clients is “How much should we be spending?” Answering this question for startups in particular can be fairly complex and varies depending on several factors. Below are the top 5 factors that we find most important in determining the optimal internet advertising budget for a startup.
1. Business Plan:
Using revenues and profits to decide how much to spend on internet advertising is popular throughout many different business models. An established internet retailer might find that they can spend up to 10% of sales on advertising, above which ad spend starts eating into margins and below which the retailer starts to lose market share. Since sales can fluctuate during the initial stages of a startup’s business plan, tying advertising spend to a percentage of sales is difficult. Some startups, for example, might not plan on generating any sales or revenue during the first few phases of their business. In these cases it is beneficial to tie advertising budget to other important milestones within the business plan such as reaching a key number of subscribers or active users, as might be the case with some tech startups.
For example let’s say that your business model calls for generating at least 100K active users before you transition into the monetization phase. Once you are able to determine an active user’s acquisition cost per advertising channel, you can begin to get a rough idea of the total budget needed for that milestone. Additionally you should take into consideration that your acquisition cost for each additional subscriber or conversion will decrease over time as your advertising campaigns and website conversion processes become more efficient. We have seen many startups begin with an initial internet advertising budget that amounts to 25% - 30% of their total budget and as the marketing channels become more efficient and revenue rises we see their marketing budget as a percentage of total budget steadily decrease to 10around 10%.
2. Advertising Effectiveness:
Eventually the amount you spend on internet advertising should more than pay for itself. However, if you limit your budget with expectations that all ad dollars should bring in a profit, you might be slow to capture market share and see competitors react in a manner that prevents your startup’s growth and potential success. That is in no way to say that your budget should not be shaped by the effectiveness of your internet ad campaigns. In fact the allocation of your budget should entirely be shaped by its relative current and potential performance. There are many ways that you can measure the effectiveness of your internet advertising campaigns, but in all cases you should be concentrating on two things: the quality of visitors produced by your advertisements and how much those advertisements cost. By maximizing this quality-over-cost ratio and distributing budget accordingly, you will ensure that the effectiveness of your internet advertisements continues to improve over time. As your advertising ROI continues to increase, so should your budget.
3. Management Resources:
Having a qualified individual who is committed to managing and optimizing the online marketing program can make a large difference in determining the advertising budget. Some business plans go as far as to account for personnel, such as an advertising specialist, to be included in the marketing or advertising budget. Other startups chose to partner with a digital marketing agency or a more specialized search marketing agency, such as ours, Effective Spend . Although we do not find that there is a set minimum amount of ad spend at which a startup should start looking for an internal marketing specialist or agency, a good rule of thumb is for a startup to spend 18% to 20% of ad spend on resources (internal marketing specialist or marketing agency) to manage that ad spend. As the advertising budget increases and the growth rate of that budget starts to level off, a business can expect to spend less as a percentage of spend (14% to 15%) due to economies of scale. Generally we find that if a startup is planning on spending at least $2,000 per month, the additional savings or added revenue they will see with better campaign optimization justify the management expenses.
4. Consumer Purchase Behavior:
Despite the multitude of different advertising channels, companies still push more than 85% of their online marketing budget towards search engine advertising due to its efficient ability to match highly qualified consumers with the product or service for which they are in the market. Determining a startup’s internet advertising budget, therefore depends on its ability to advertise effectively through the search engines. Generally search engine advertising works best to convert searchers who already have an idea of what they want. Startup businesses that are able to determine when the searcher is in the market for their products or services by the keywords they use, stand the best chance at succeeding in search marketing. Conversely products or services that require a lot of education before the consumer understands the benefit are generally harder to advertise using paid search ads. Startup businesses, who have products and services with a simpler purchase cycle and who have a clear way to identify their target consumer, spend significantly more on internet advertising than those who do not. I have listed the following industries to give you an idea of the businesses that generally do well with search advertising: Retail, Education, Banking, Healthcare, Local Services, Software, and Travel. Conversely extremely high tech, Aerospace, and complex software businesses might not do as well due to the complex nature of their product offering.
Most startups have a point at which capacity constraints restrict their ability to increase sales. This issue is most obvious in the manufacturing industry, but is also seen in several other industries due to limited personnel, inventory, bandwidth, etc. Your internet advertising campaigns can serve to throttle sales velocity and help to prevent exceeding capacity. For example at Effective Spend we work with several day spas that deal with capacity issues on a regular basis. We have developed a tight communication process that allows us to incorporate information related to their projected capacity into the online marketing campaigns. When sales are within 80% or more of capacity for a particular service offering, we strategically reduce the marketing spend by 20 – 30% in that area, ensuring that they are not wasting ad spend on visitors who are not likely to convert. Alternatively we help to boost demand driven by the online campaigns when we see that there is a good deal of extra capacity.