“What should our budget be?” I get this question often. I used to think “as much as you can afford.” That's not quite right. Here are methodologies — and a calculator below — to help you set an appropriate budget for your business's size, goals, and margins.
How much is too much?
It's personally disappointing to me when I see store owners overspending on ads. All the time and effort spent creating products, ultimately wasted on ads that cost more than they netted for the company. Of course, there are reasons to overspend at times to acquire the customer.
Let's say your average customer is worth $1,000 in lifetime value (LTV). Assume $500 of that goes to cost of goods sold (COGS), 25% to fulfillment, and $150 is reserved for profit. That's $150 left for acquiring a new $1,000-LTV customer. Our cost to acquire a customer (CAC) should be $150 or less.
$1,000 lifetime customer value (LTV)
- $500 cost of goods sold (COGS)
- $250 miscellaneous costs
- $150 profit taken
= $150 remains to budget for cost to acquire a customer (CAC)With that, we know we can spend up to $150 to acquire a new customer while paying bills and taking profit.
Let's assume that, although the LTV is $1,000, the average order value (AOV) is $250. Therefore a 166% return on ad spend (ROAS) — that's $250 divided by $150 — is acceptable. That's equivalent to a 60% advertising cost of sale (ACoS).
$1,000 LTV
$250 AOV
$150 available to acquire one new customer
$250 AOV / $150 CAC = 166% ROAS
$150 CAC / $250 AOV = 60% ACoSAnything over $150 CAC, 166% ROAS, or 60% ACoS is too high. Anything less is acceptable. So to answer “what should my budget be?” I ask: how many new customers do you need each month? If you say 1,000, I take your $150 CAC and multiply by 1,000 and set your recommended budget to $150,000 per month.
1,000 desired new customers
× $150 CAC
= $150,000 monthly ad budgetOr replace $150 CAC with a desired monthly revenue and a required ROAS target:
$250,000 desired monthly revenue
÷ 1.66 (166% ROAS)
= $150,602 monthly ad budgetAd Budget Calculator
Enter your desired monthly revenue and your required minimum return on ad spend. We’ll tell you what monthly ad budget that implies.
Recommended monthly ad budget
The “marketing mix”
The “marketing mix” is a term coined by Neil H. Borden in the 1950s. He based the concept on James Culliton's work, which surveyed consumer goods companies to understand what percentage of marketing budgets they invested into given functions. He found no consistent pattern of investment — each company followed vastly different allocations.
The marked differences in the patterns or formulae of the marketing programs not only were evident through facts disclosed in case histories, but also were reflected clearly in the figures of a cost study of food manufacturers made by the Harvard Bureau of Business Research in 1929.
— Neil H. Borden, 1952
Borden made no recommendation on specific budget allocation percentages. He instead assembled a list of “Market Forces Bearing on the Marketing Mix” and advised how a company could best react to these forces with marketing activities.
There is no exact “best practice” as to what percentage of an ad budget belongs in PPC vs. SEM or influencer vs. snail mail. Instead, the marketing-mix concept gives us a framework with which to work out budgets ourselves.
When building a marketing program to fit the needs of his firm, the marketing manager has to weigh the behavioral forces and then juggle marketing elements in his mix with a keen eye on the resources with which he has to work.
— Neil H. Borden, 1952
Full Neil H. Borden article
Check out “The Concept of the Marketing Mix” article in its entirety below. This was printed in Science in Marketing, George Schwartz (Ed.), New York: John Wiley, 1964.
