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Effective Advertising: How to Calculate Ad Budget

11 min read

Supercharging your business’s growth through effective advertising is like igniting the afterburners on a high-performance jet. When done right, you skyrocket; however, a miscalculation could result in a rapid descent.

That’s why landing on the perfect ad budget is crucial. But how do you define what’s “perfect”? It’s about aligning every cent spent with your business goals, and we’re here to be your mission control.

Why Your Ad Budget Matters

In a world where even the tiniest details can make or break a company’s ad game, grasping the decision-making that goes into every campaign is crucial.

Your ad budget is the financial backbone of your marketing efforts. Every dollar should be put to work effectively to give the best ROI, aka return on investment. It isn’t a number you pluck from thin air or borrow from the neighbors. It needs to be strategic, just like your advertising needs to be targeted.

However, the critical question lingering in every business owner’s mind is, how do I know how much to spend for effective advertising?

Before Calculating Your Ad Budget

Figuring out how much to spend on ads is a matter of balance. You don’t want to waste money by overspending, nor do you want to be ineffective by underspending. There is a Goldilocks-like “just right” zone that will bring in results without affecting your margins.

Before we start, there are a few key terms you need to understand:

Markup is the difference between the cost of a product and its selling price (gross profit above cost). It is usually expressed as a percentage.

For example, if you sell a product for $150 when it only costs you $100, your markup is 50%. You’ll want this figure for all your products individually and in your store.

Margin is your gross profit expressed as a percentage of the selling price.

In the above example, your profit would be $50. Thus, your total margin would be 33.3% ($50/$150).

Cost of occupancy is the cost of keeping your ecommerce store up and running (such as web hosting, inventory management, and shipping and handling). These costs are usually static and predictable.

You need these metrics before you can start calculating your ad budget. In a separate spreadsheet, make a note of these metrics.

You might have something like this:

	Margin	Markup	Cost of occupancy
Product #1	33.33%	50%
Product #2	54.54%	120%
Product #3	37.5%	60%
Average for Store	43.39%	76%	$30.000

Once you have this data, you can start calculating your ad budget.

Calculating Your Ad Budget for Effective Advertising

How much you can spend on ads will depend on three things:

Niche: Stores in certain niches can get away with spending less on ads because of higher margins or stronger word-of-mouth or social media reach. This is particularly true for fashion or highly niche-specific stores.
Business stage: You’ll have to spend extra on ads in the early stages of your business to establish your brand. Late-stage companies can get away with spending as little as 3% of their annual revenue on advertising.
Margins: Advertising budgets are usually a function of your margin. The higher the margin, the more money you’ll spend on ads.

The US Small Business Administration advises allocating 7-8% of your gross revenue towards marketing and advertising if your annual sales are under $5 million and your net profit margin ranges between 10% to 12% post-expenses.

Understand that this also includes brand development costs, including spending on websites, blogs, and social media. Usually, you’ll have no more than 3-5% of your annual revenue to spend on advertising.

With this in mind, let’s look at a step-by-step process for calculating your ad budget.

Step 1: Calculate Your Minimum and Maximum Possible Ad Budget

As mentioned, most businesses allocate 5 to 10 percent of their annual revenue to advertising. Here, 5 percent would be the floor and 10 percent the upper limit.

Start by calculating these lower and upper limits on your ad spend.

To do this:

Take 5% and 10% of your projected annual sales
Multiply each of these figures by the average markup per transaction.

For example, suppose your business is projected to do $1M in annual sales this year. 5% and 10% of your annual sales would be $50,000 and $100,000.

Suppose your profit margin is 60%, i.e., you make $600,000 in profits with $400,000 in costs.

Therefore, your markup would be 150% ($600,000/$400,000 * 100).

You have figures like this:

Annual Sales (A)	5% of Sales (B)	10% of Sales (C)	Markup (D)	*5% of Markup (B D)**	*10% of Markup (C D)**
$1,000,000	$50,000	$100,000	150%	$75,000	$150,000

Thus, your minimum and maximum ad budget is $75,000 and $150,000.

Step 2: Calculate the Adjusted Ad Budget

The above is your “raw” budget since it doesn’t include your cost of occupancy (i.e., the cost of running the store).

To get your adjusted figure, simply deduct the cost of occupancy from the raw minimum and maximum budget.

For example, suppose these are the annual costs associated with running the store:

Ecommerce software: $2400
Payment processor: 2% of annual sales ($20,000)
Hosting: $1200

Thus, your “cost of occupancy” is $23,600.

Your adjusted ad budget is as follows:

Minimum: $51,400 ($75,000 – $23,600)
Maximum: $126,400 ($150,000 – $23,600)

This figure tells you how much you can expect to spend on annual ads.

Pro tip: You can reduce your occupancy cost using a budget-friendly ecommerce platform like Ecwid by Lightspeed. You’ll get a robust online store fully hosted and maintained by Ecwid, plus dozens of built-in business management and marketing tools to grow your business.

Best Practices for Effective Advertising and Budgeting

Now, you have step-by-step instructions on how to calculate your ad budget. For best results, here are some best practices to keep in mind:

Start Small

If you’re just starting with advertising, it’s always better to start small and gradually increase your budget as you see results. It will help you avoid overspending and allow you to make adjustments along the way.

Set Clear Goals and Objectives

Before creating your ad budget, it is vital to identify your business goals and objectives. Otherwise, it’ll be hard to evaluate the effectiveness of advertising.

Whether it’s to boost sales, increase website traffic, or elevate brand awareness, your objective should be crystal clear even before you boot up an Excel sheet.

Goals should be Specific, Measurable, Achievable, Relevant, and Time-bound. Known conveniently as S.M.A.R.T, these goals ensure your intent is as sharp as your execution should be.

Keeping your objectives and goals in mind will help you determine the types of ads you need to run and the platforms you should use. For example, if your goal is to increase brand awareness, social media ads may be better than traditional print or TV ads.

Adjust for Long Game vs. Quick Win

Advertising effectiveness ultimately boils down to how well your tactics align with your goals.

Different objectives call for other strategies. Long-term brand-building efforts require a sustained, consistent ad presence. Quick sales might push for a flashier, short-term ad campaign.

Consider Ad Platforms

Where you place your ads can have a significant impact on their effectiveness. Think about your target audience and where they spend their time online. It will help you choose the most appropriate platform for your ad campaign.

Consider using multiple platforms to reach a wider audience and increase the chances of success. For example, if your target audience is primarily young adults, social media platforms like Instagram and Snapchat may be better. At the same time, TV advertising effectiveness is likely to be low.

Additionally, different ad platforms offer various types of targeting options. For example, Facebook and Google Ads allow you to target specific demographics, interests, behaviors, and locations. It can help narrow your audience and ensure your ads reach the right people.

So, if you’re wondering, “Is social media advertising effective?” the answer is it definitely is, as long as the ads are targeted right.

Using Ecwid by Lightspeed for your online store, you can optimize your Facebook and Google ads with Kliken. It’ll help you set up and automate ads and optimize them for a better return on investment.

Track and Analyze Ad Data

Keep track of your ads’ performance and use this data to make informed decisions about your budget. Adjust accordingly if certain ads or platforms don’t yield the desired results.

If you use Ecwid by Lightspeed, measuring advertising effectiveness is easy with the Reports tool. It has a Marketing section that helps track order sources, be it Google ads, Facebook ads, or other marketing channels.

Wrap Up

With these strategies in hand, figuring out an ad budget that meets your business goals and guarantees an excellent return on investment turns into a smart move, not a scary one.

Dealing with ad budgets isn’t just about finance but vision. It’s about translating the intangibles of advertising into actionable strategies that leave no room for interpretation — and every room for growth.

You’re not just calculating an ad budget; you’re architecting your path to market success. And with the strategies unearthed here, you’re set to craft an advertising budget that’s not just a figure on a sheet but the lifeblood of your most effective advertising.

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About the author

Anastasia Prokofieva is a content writer at Ecwid. She writes about online marketing and promotion to make entrepreneurs’ daily routine easier and more rewarding. She also has a soft spot for cats, chocolate, and making kombucha at home.