October 25, 2014

Online Marketing: How Much To Spend

Are you promoting a product online with a finite budget? Or maybe you need to follow a measurable marketing plan at your larger company? Imagine you have $5,000 per month for online marketing – how do you go about spending this?

online marketing

Boil It Down To One Customer

Let’s say, I am selling a software product for $100 per month subscription. How much would I pay for a new additional customer? In other words, if I can simply pay to acquire another 40 or 50 customers per month, what would I be willing to part with?

To answer this, you should calculate the “Life Time Value” (LTV) of your paying customer. In other words, how many months does one customer continue paying the $100? If the answer is 5 months, then your LTV is $500. Of course, to earn $500 you would not spend more than this amount on acquiring a customer.

There are lots of equations, depending on the product, to derive the ideal acquisition cost. But I believe the situation is different for everyone. For example, in venture-funded software companies, or newer ecommerce companies, folks spend an insane number of dollars to acquire customers (at first), because they are trying to capture a large portion of the market and create their brand name. In other cases, there is stiff competition in what you are pursuing, and thus you will need more marketing muscle.

However, my view is simple – you should spend what you are comfortable with. I will be chewed out by analysts and math geniuses for suggesting this approach, but I have my reasons.

Unless you have a strongly defined goal, such as, “I need 1000 paying customers to launch the phase 2 of my idea,” you should spend based on:

1.) The cash you have available for the next 12 months

2.) all other costs that you have to account for, from the $500 revenue per customer

Of course, not all costs are variable (on a per customer basis), but you should assume that you are not going to acquire 10X customers in the next couple months.

But Where Do I Spend My Money?

After all the above calculations, you may conclude that you are comfortable spending $100 to acquire one new customer. Since we do not have a specific business or product example, I am going to stick to my software subscription model from above.

Let’s assume you will scout out all the different options such as Google Adwords, email newsletter campaigns run by reputed vendors/partners that serve your audience, online banner ads and ad networks. “Scouting out” means you will have to make an estimate (educated guess) on what traffic is going to give you one new customer for every $100 spent.

Let’s look at this example to understand how to make this guess better:

You are setting up an Adwords campaign with a total budget of $1500 per month ($50 per day). The keywords that you want have suggested bids of $3/click for the first page. Assuming your budget gets utilized every day; this translates to 500 clicks for the month. From your site’s past traffic data, you must have calculated the number of visits that convert to customers.

For example, if 10% of visitors sign up for the trial, and then 10% of those pay – your result for the Adwords campaign would be 50 trials (10% of 500) and 5 paying customers (10% of 50). At $1500, that translates to a $300 acquisition cost. Three times more than your $100 comfort level.

So maybe Adwords is not for you. The only way to find better channels is to either experiment with a few different networks or get references and reviews from advertisers going after the exact same market. On the flip side, keep in mind that you need to stick to a campaign for at least 4-6 weeks. Doing something for a week and calling it a failure is simply not enough data.

While assessing different ad networks, ask them what their average CTRs (Click through Rates) are. This is relevant when you are paying per impressions, instead of per clicks. These networks will take a fixed sum of money from you and promise, let’s say, 200,000 impressions. But you need to know the average clicks that advertisers get on those particular sites.

Online Marketing Money Photo via Shutterstock

8 Comments ▼

Raj Sheth


Raj Sheth Raj Sheth is the Co-Founder of Recruiterbox, an online Recruitment Software & Applicant Tracking System designed especially for small businesses. Growing a small business himself, everything he writes is based on what he has experienced in his ventures.

8 Reactions

  1. Great strategy and I often have to work through this process when I add PPC clients to determine the target CPA.

    • Yes, I am still trying to find the happy medium. The challenge is that sometimes ads have a lagged effect. A person might visit my site today through an ad, but sign up a couple months later. Hard to track :)

  2. Raj,

    Thanks for this post.

    Some interesting math equations for sure.

    Thanks for simplifying things for simple old me.

    he Franchise King®

  3. Great break down of customer acquisition cost. This is something that I do not think that many small businesses look at when they are looking to market themselves online. There are many ways to way overspend for getting new customers.

  4. This is a great assessment, especially for small businesses. My insurance agency calculates everything the same way. When considering a new expense, we boil everything down to how many policies do we need to sell to cover that new expense. Since we know the value of the time and effort selling those policies cost us, it gives us a much better picture of how much we can afford to spend.

  5. It’s my good luck that I clicked on this blog today and got your article and learned that how to decide that how much and at what place we should plan our advertisement campaign to grab some more customers in limited budget.

    Thanks for posting your experience man,
    it’s really informative.

  6. A lot of truth in your words. Especially the part about not giving up on something too quickly. Often, people will have made a note of the service/product you provide, but don’t need it immediately. When the time comes, if your brand is well known, they will come back to you. I was surprised to see some stats on the Brandvocates site the other day. Apparently the word-of-mouth, social media, PR presence, testimonials, videos, etc services that they provide can cost 10% of what old school commercials cost. And we all know how far reaching internet marketing can be. It made me think that that could well be a viable cost for marketing purposes. I now know to find out what sort of numbers they reach with these methods.
    Thanks for the informative article.

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