Calculating the right Ad Spend

Journey Based Advertising: Chapter Four

Determining the right ad spend is crucial to see a good ROI. The goal should always be to get a positive return on your ad spend investment, which comes down to getting more revenue out of your ads than the cost that you are putting in.

How do you determine your ad spend?

Most ad networks will use a bidding strategy.

A bid is the maximum amount of money you're willing to pay for the desired action on your ad. Say your max bid is £5, and the next highest bigger is £3; the way the bidding strategy works means you will only pay the minimum amount needed to win the bid. In this case, it would be £3.01. Pretty good, right?

You want to bid competitively, but you also want to see a positive return on your investment. To determine what your ad spend should be, let's work backwards.

First, we need to calculate three metrics.

  1. Lifetime Value of your Customers (LTV) is the first metric to identify. This is the yearly revenue your average customer brings you, multiplied by the average lifespan of your customer. You should subtract how much it takes you to service that customer yearly. This number is your Lifetime Value or LTV.
  2. Next, you will need to calculate your Average Conversion Rate. This is the percentage rate at which website visitors to your site convert on a form to become a lead.
  3. Lastly, you will need to calculate your Average Lead to Customer Rate. This is the rate, (percentage of), at which leads become paying customers.

Now we can do the maths to calculate your break-even bid.

1 / Average lead-to-customer rate = (X) how many actions you need to get a lead

X / Average Conversion Rate = (Y) how many clicks on your ad you need to generate one new lead

LTV / Y = Break-Even Bid

Your break-even bid is the maximum number you should bid on a campaign budget. It's okay if you don't have these metrics, to begin with – you can adjust them as you get more results back.

You might want to understand a few months in how your ads performed on revenue. This is where ROAS comes in.

ROAS= return on ad spend

Revenue from campaign / Amount spent on a campaign. ROAS helps you understand your actual spend on advertising and provides insights that will be useful for prioritising the ad campaigns that bring in the highest return.

Advertising Management from ExtraDigital

Whether you want to advertise on social media or dive into search marketing on Google (PPC), ExtraDigital are here to steer you in the right direction. We have many years of experience running adverting campaigns that produce excellent ROI. Get in contact with us today, and we will be happy to help!

Next Chapter: 05 - Advantages of Social Media Ads

Saturday 25th April 2020

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