10 Nov 2020
Slowly and surely, marketing migrates from television, papers, and billboards — to the digital space. Want to survive? Go with the tides and allocate funds to digital marketing.
In a recent article, the journalist of The Economist called expenses on digital advertising “the new rent.” Companies spend less and less money on their offline activities, and more on “renting” the digital space that can be used for advertising and promoting goods and services. By this, we mean that important things deserve good spending. However, it’s fairly possible to optimize the costs as well.
This text will cover the following:
- what the digital marketing budget consists of
- general budgeting rules
- budgeting step by step
- budgeting for CPA marketing
The article contains lots of helpful links, examples, and marketing terms. You’ve been warned 🙂
What the digital marketing budget consists of
Digital marketing is a modern way to promote goods and services and communicate with customers. This aspect comprises dozens of verticals; here are some of them:
- email marketing
- webinars and online conferences
- text content, blogs
- contextual advertising
- interacting with influencers
- cooperating with affiliate networks
Don’t expect that this text will give you a magic, exact amount you need to invest in digital marketing to achieve success. In fact, it depends on an array of factors, including the company size, maturity stage, industry, region, goals, and duration of planned projects. Anyways, we will give you a hint on which cost items to keep in mind.
Another disclaimer. There are myriads of methods to plan out a budget. We are only talking about a few.
Experts believe digital marketing budget must constitute some 10% of the company’s income. However, in some companies, this share reaches 40%. It’s recommended that new-to-market brands invest more money in digital promotion than more mature enterprises. But it all depends on your company’s goals.
Digital marketing’s share in budget by vertical (source):
B2B Goods: 8.6%
B2B Services: 8.7%
B2C Good: 9.8%
B2C Services: 15.6%
General rules of working out a budget
Calculating a budget is all about math. To master a tricky task, you need to be well-versed in the numbers of your company. Here’s what you need to know.
- Customer lifetime value (CLV). Basically, CLV is the total revenue the company generates from one customer throughout the entire period of their relationship. You can find the formulas to calculate CLV here.
The higher CLV, the more money the company can invest in advertising. Here’s a simple case. In Apple, CLV comes to $8,000. A spinner manufacturer’s CLV will be hundreds of times lower — due to the product price and specifics. Actually, Apple will allocate much more money to marketing.
- Conversion funnel: how the company turns cold clients into warm clients. Read more about the funnel here.
- Traffic-to-lead conversion rate (here’s how to calculate it).
- Return on investment (ROI). In our case, we need to know the return on investment in marketing. Find the formula here.
- Cost per action (CPA) and customer acquisition cost (CAC). Read this to learn the difference between these two terms and how to calculate them.
To work out the digital marketing budget, you need to understand who your target audience is. Where do those people live? Who are they, how much do they earn, what are they interested in? What are their pains? To figure out how to sell, you need to know whom to sell.
Based on this, pick platforms for digital marketing. Each of them has unique specifics and audience. For instance, Instagram and Pinterest work best for mass market goods. In LinkedIn, B2B goods and services are suitable.
A widely used method for working out marketing budget is based on the goal. Learn more about how to set goals for marketing campaigns here. It’s recommended that goals are linked to a specific product or product line and you form the budget based on this — considering campaign length, regional reach, platforms, and promotion instruments.
Every digital platform can be used for corresponding goals. Those are not necessarily sales; a goal may be brand awareness—and it can later reduce expenses on advertising. For instance, Google Ads offers to choose the goal of the advertising campaign at the first stage of setting up the campaign. Set clear goals and indicative respective KPIs for them.
Examples of KPI for digital marketing
A handy way to calculate the budget for companies that struggle to set marketing goals is to use CPA. Assume a company is going to sell 100 items of a product and knows the CPA value. You need to multiply 100 by CPA. The product will be the investment in marketing required to sell 100 items.
Important! CPA and CAC must be lower than CLV. Pure logic: if CPA and CAC are lower than CLV, it means the company spends less money on acquiring a customer that earns from them.
Another way to plan out the budget is to divide the marketing budget into several components. Example:
- marketing studies
- creating advertisements (content, banners)
- placing ads in various spaces
- paying salaries or paying for services of an agency
Experts recommend that one should spend the minor part of the budget (some 15%) on the second item, and the major on the third.
Of course, you can always get inspired by how your rivals handle budget matters. For that, carry out a competition study: pick companies that are similar to yours, scrutinize their websites and social media profiles, and the content marketing strategy.
Please keep in mind that marketing expenses should be adequate to the market share your company holds. In other words, if you own a small local coffee shop, you are not supposed to invest as much in marketing as Starbucks. Scale it up or down!
Pro tip. If you have already carried out marketing campaigns, the best way to optimize the new ones is to analyze the results of the previous ones. For instance, check out ROI of different digital marketing channels. If the ROI of SMM campaigns is twice as high as that of email marketing, why not spend more on social media and restrain newsletters for a while?
Budgeting step by step
Let’s delve into the components of digital marketing. So, your budget will be spent on the following.
- Marketer’s salary. Your full-time marketer will develop and supervise fulfillment of the marketing strategy.
- Online presence (e.g. website development). At least, you need a landing page where you will describe your brand’s or product’s advantages.
- Creating engaging, valuable content with little (or, better, no) advertisement. The major cost item here is payroll for content makers and distributors: email marketers, SMM managers, copywriters, content marketers.
Pro tip. If your content projects are not scheduled or prioritized, you may want to outsource those tasks using the piece payment basis. Alternatively, involve part-time freelancers. Anyway, it will be less costly than hiring a full-time specialist.
Most platforms are ready to publish valuable content with little or no advertisement for free. Here are some examples of such platforms.
Creating selling content: video, images; texts for blogs, social and other media. Here we spend on compensations to authors, publishing, distribution, and software. While engaging content can be published on popular spaces for free, selling content is always subject to payment.
- Content creation software. You need to keep track of analytical data (you can use Google Analytics for that). Also, you will need social media management software (e.g. SMMPlanner), email newsletter management systems (e.g. MailChimp). For your website or blog, you will need a paid domain and hosting, platform, or CMS (learn more about starting a blog here).
- Targeted advertising on social media. The budget depends on social network, goals, industry, season (read about it here). It’s impossible to calculate expenses without profound knowledge of the company’s specifics, but here’s a rough example.
A company needs to acquire 500 clients in a month, each of which must buy a 200-ruble-worth product. Assume that one Facebook click will cost 1 dollar; 1% of users who clicked will contact the company (e.g. to learn more about the product). Of those, 10% will become clients and purchase the product. Eventually, the acquisition cost will be 1 dollar / 0.1 = 10 dollars. Multiply this value by the desirable number of customers, and you will get $5,000. This is the amount the company needs to invest in a social media promotion campaign to get 500 clients.
- There are other ways to acquire clients on social media. Firstly, promote your products in popular communities (or, alternatively, in small and niche communities with very loyal subscribers). You can do via Facebook Ads Manager. You can do it through a marketplace or contact community managers directly.
Secondly, you can find influencers that will promote the company on their blogs and test-drive the products. Blogger marketplaces like Epicstars may come in handy.
- Contextual advertising. This is a safe way to adapt to users’ search queries and sell products and services to the relevant audience. Contextual advertising campaigns are set up in accounts of advertising networks (e.g. Google Ads).
You will have to invest both in advertising and in paying a specialist who will set it up, pick keywords, identify the target audience, and design attention-grabbing ads. Again, that can be an outsourced specialist.
Google’s recommendations on working out an advertising campaign budget
Another way is publishing banners on pages of partner websites. You can do it either through marketplaces or by reaching out to website owners. It’s reasonable to compare the costs of both options.
- Content and website SEO. It’s the same as with contextual advertising specialists: hire a full-time SEO manager or outsource.
- CPA marketing. You will read more about it below.
While planning out the digital marketing budget, make sure you describe cost assessment for every item in detail. Monitor ROI of every marketing aspect.
CPA marketing budget
Affiliate marketing can be a great source of sales in terms of budgeting. It helps avoid expenses on testing advertising campaigns. Also, you don’t have to calculate client acquisition costs. This way, the CPA model can facilitate budgeting for advertisers. As a cherry on top, the CPA model usually shows high ROI (see example below).
Affiliate networks for advertisers: first steps
On the other hand, the paradigm “setup once and forget” does not work here. An advertiser needs to constantly develop and improve their affiliate program: offer new terms and deals, connect new traffic channels, etc. Read more about ways to improve a program here.
The CPA budget directly depends on the vertical where the company operates. For instance, e-commerce companies rarely allocate any specific budget to CPA. This is because affiliate marketing is usually not subject to any initial budget. The company shares earnings with the affiliate network and publishers, as the latter are ones who generate revenue for the advertiser. However, major companies sometimes do devote funds to the CPA budget.
Again, the advantage of affiliate marketing lies in its predictability. The advertiser always knows the product price and commission rates. All this enables them to calculate marketing expenses per sale in advance.
Sure, there may be unexpected situations. For one, publishers may generate too many sales. And the advertiser has to pay for all of them. In such a case, it’s justifiable to use part of the next month’s budget for this purpose. Actually, such surges can also be foreseen. Seasonal changes are well known, and deals and sales are announced long before they start.
Good to know. Usually, affiliate marketing can add up to 10% to a company’s current traffic volume. However, the store’s policy, season, vertical, and other factors can heavily affect this value. There are no two cases alike.
Pro tip. To calculate ROI of an affiliate program, we will do the following. Say, the company sells a product for $50 each. Publishers get a 10-percent commission, and another 2% is the affiliate network’s fee. Here’s the final formula: (50 – 10 – 2) / 12 = 3.2. This way, ROI comes to 320%. It’s great, because ROI over 100% is considered good.
By the way, ROI of the company’s CPA channel depends on the marketing budget invested in other channels. Put simply, if the company spends on brand awareness, affiliate marketing will yield better results, because people are more likely to buy products they have heard of.
When planning out the affiliate program budget, make sure you take into account three main cost items:
- Affiliate network: creation of or participation in; network’s and publishers’ commissions.
- Publisher’s tools: advertising and creativity; product feeds; landing pages.
- Affiliate program management: recruiting managers; improving the program; analyzing results; optimization.
First, decide on whether the company is creating an affiliate program or connects to an existing one. The first option is for those who want to play by their own rules only. But, this way is by far costlier, more complicated, and longer. It will require creating and promoting the ad space and the program, engaging affiliates, and developing tools.
Affiliate networks are intermediaries between advertisers (companies) and publishers (people who promote the company’s products). Such networks cover all the difficulties and nuances like integration and dispute resolution, and assist with developing the program. However, they also charge interest for their work, but only from completed sales a publisher led. That interest, as well as the commission the advertiser pays to the publisher, is included in the product cost or the company’s marketing budget.
How affiliate networks work: infographic
Beside, every affiliate network has terms governing cooperation with advertisers. For example, if a company handles little traffic and operates in a not very promising niche, the network may refuse to work with it. Also, affiliate networks prefer working with B2C companies.
As for expenses on creatives (banners, videos, texts, landing pages), you are not to save on them. Those instruments are tools affiliates will use to drive traffic to your company. The better the materials, the better publishers’ performance in promoting products and services. Don’t forget to update creatives regularly.
By the way, most advertisers allow publishers to develop their own creatives. This is another good way to save on creating content. But all these terms should be meticulously described and defined; and it’s recommended that you approve publishers’ creatives before implementing them.
Further management of a launched affiliate program doesn’t require much expense. But, don’t forget to have enough funds on your balance so you can pay your publishers on time.
For advertisers looking for even larger profit, affiliate networks have additional options. For one, they offer publishing a paid promo in the affiliate network or participate in deals and marathons affiliate programs regularly hold. Or, they can suggest hosting a training webinar for publishers.
Affiliate networks assign a manager to every advertiser. However, some companies hire an in-house specialist to develop affiliate programs.
No matter how much a company invests in marketing, success hinges on quality of products and services and reasonability of prices. Don’t disregard these aspects, and marketing will do its best. Good luck in planning out and disbursing the budget!