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The question of how much money to allocate to an ad or PPC budget often arises, as well as how to start with minimal risk and scale a business online. While there are always multiple factors in a business, such as physical constraints (products have to be produced and received), cash flow constraints, labour force constraints, etc., there are many business models that can work and scale online.
The first step is to define the initial budget. The media budget is divided into two categories: developmental budget and cash flow budget.
Developmental Budget: The developmental budget is used for testing new forms of advertising. For example, £500 may be tested on 3 different forms of products or services offered – £1500 total at risk. The value (profit) of a lead/sale needs to be determined. For example, if a sale can be allocated £50 in ad spend to acquire:
CategoryAd SpendLeadsLead ValueGain/Loss
A£5005£250(£250)
B£50010£500£0
C£50020£1,000£500
In this example, £250 of the test budget was lost in category A. This ad test is ceased, unless there are correctable factors found that are causing traffic not to convert. Category B is break-even, encouraging efforts to improve performance. Category C is successful and budget constraints lifted, making this a “cash flow budget”. In other words, if leads can be generated at £25 in spend, £5,000 can be spent and generate 200 sales, this is allowed to happen with its own cash flow, instead of using the “at risk budget” (unless of course the leads overwhelm the business and efforts need to be held back).
Cash Flow Budget
As various tests prove to deliver consistent results, budget constraints are lifted and the campaigns are fully funded to deliver as many leads as possible and buy all the traffic possible. These profitable campaigns are generally highly defined niches of traffic which will be limited in the availability to buy – so instead of being limited by budget, the limitation is the number of potential customers searching for a particular set of keywords or viewing a certain site. In order to further expand, you then test further niches or expand into new markets.
Scalable Models
Many companies greatly underspend in their proven customer acquisition strategies. As acquisition is generally the most difficult and expensive form of marketing, if this can be tracked and scaled up, then the business can dramatically grow. As a rule of thumb, companies that can deliver new customers at a tracked cost of 50% of annual gross profit or less tend to have scalable models.
Acquisition should feed other less expensive forms of marketing, such as email to customers, and should lead to repeat or recurring business, word of mouth, referrals and expansion of business into existing customers.
Following this model, ad budgets can start with a monthly budget of £/$500-2,500 and can grow to tens or hundreds of thousands per month, with a risk basis carefully managed at a low base level.
Diginius offers managed services for companies looking for help in managing their online ad campaigns.
Written by Nate Burke
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Chester Yang is the Microsoft Program Manager at Diginius with a background in economics and quantitative research.
At Diginius, Chester focuses on nurturing partnerships with PPC agencies and integrating marketing and sales solutions.
