How Much You Should Actually Spend on Digital Advertising in 2021

How Much Should You Really Spend on Digital Advertising in 2024?

Digital advertising has become an essential part of most businesses‘ marketing strategies in our increasingly online world. But with so many options and complexities, it can be hard to know exactly how much you should be investing in digital ads to drive optimal results for your company.

The short answer is – it depends. There‘s no magic, one-size-fits all number for digital ad spend that will automatically propel your business to success. However, by analyzing key factors about your unique business and following a data-driven budgeting process, you can zero in on the right level of investment to maximize the impact of your digital advertising.

Here‘s what you need to consider to build a digital ad budget that will help you hit your business goals in 2024 and beyond:

Align Ad Spend With Revenue Goals

The ultimate purpose of any marketing effort, including digital advertising, is to drive business growth, usually in the form of increased revenue. So the first step in deciding on your ad spend is looking at your company‘s overarching revenue goals.

How much is the business aiming to grow revenue, and what portion of that growth is marketing responsible for based on historical data? And within marketing‘s piece of the pie, how much is digital advertising expected to contribute compared to other channels?

Let‘s say your company‘s goal is to increase annual revenue by $500,000 this year, and marketing is on the hook to drive 20% of that, or $100,000. If you estimate based on past performance that digital advertising efforts generate around 30% of marketing-driven revenue, that means ads need to bring in $30,000.

Of course, revenue goals and marketing‘s share of the load will vary widely based on business size, maturity, industry and more. But starting with a concrete revenue target allows you to work backwards to a specific digital ad budget range required to hit that goal.

Know Your Numbers

To translate overall revenue goals driven by digital ads into a defined spend budget, you need to have a handle on some key metrics:

Return on Ad Spend (ROAS): A fundamental measure of digital advertising success, ROAS tells you how much revenue you make for each dollar spent on ads. If historical data shows that for every $1 you spend on search ads, you generate $4 in revenue, the ROAS of your search campaigns is 4:1 or 400%.

Customer Lifetime Value (LTV): Possibly the most critical number for informing ad spend, LTV is the average amount of revenue a single customer brings in over their entire relationship with your business. Estimating LTV allows you to gauge how much you can afford to spend to acquire a new customer. If your average customer LTV is $1000, you likely don‘t want to spend more than a few hundred dollars to gain that customer through advertising.

Lead to Customer Rate: While some digital ads may drive direct online sales, many B2B or considered purchase consumer journeys involve multiple touches, with ads driving leads that ultimately convert to customers. Understanding what portion of your leads historically become customers helps determine how many leads you need to bring in through ads to hit customer acquisition and revenue goals. If you convert 5% of leads to customers, you know you need 20 leads to gain one new customer.

Website Conversions: Whether you‘re sending ad traffic to your site to make a purchase, fill out a lead gen form, or take another valuable action, conversion rates are a key input for ad budgeting. If landing pages convert at 10%, and you typically need 50 leads to generate a customer, you can work out that you need to drive 500 ad clicks to ultimately gain that customer.

Cost Per Click/Action: Of course, digital advertising isn‘t free – you need to know how much you‘re paying for each ad click or other desired action. Average costs per click (CPC) or cost per thousand impressions (CPM) vary significantly by ad platform, format, targeting, industry, and more. But based on historical data and some competitive research, you should estimate your expected CPCs or CPMs for budgeting. If a click costs $2 based on your typical bids, and you need 500 clicks to gain a customer, you‘d need to budget $1000 in ad spend per customer acquired.

Armed with these metrics, you can connect the dots to calculate how much ad spend is needed to bring in your goal number of leads and customers.

Here‘s a quick example:

  • Goal: 50 new customers through digital ads
  • Average lead to customer rate: 5%
  • Leads needed to gain one customer: 20
  • Total leads needed to gain 50 customers: 1000
  • Average landing page conversion rate: 10%
  • Ad clicks needed to generate 1000 leads: 10,000
  • Average CPC: $2
  • Budget needed for 10,000 clicks at $2 per click: $20,000

In this scenario, you‘d need to invest approximately $20,000 in digital advertising to land 50 new customers, assuming all of your baseline metrics hold true. That $20,000 in ad spend divided across 50 customers equals $400 per acquisition.

But remember, if your average customer lifetime value is $1000, and you‘re spending $400 to acquire each one, you‘re achieving a healthy 150% ROAS ($1000 LTV – $400 CAC / $400 CAC).

Of course, your mileage may vary based on all the factors discussed above. But this example illustrates how drilling into the underlying metrics behind your digital advertising goals is essential for setting a sufficient budget.

Industry Ad Spend Benchmarks

While every business is unique, it can be helpful to look at benchmarks for digital ad spend in your industry for guidance. According to a Gartner CMO Spend Survey, companies across sectors spent an average of 11.8% of their annual revenue on marketing in 2022, with around 56% of that going to digital channels.

Ad spend also scales with size – small businesses may only allocate 1% of revenue to advertising while large enterprises often spend 10% or more. A 2021 BrightEdge study found that 53% of marketers surveyed planned to spend over $1 million annually on digital ads.

Newer companies tend to invest more aggressively in advertising as a portion of revenue in order to build awareness and grow their customer base quickly, while more established brands generally have lower ad budgets as a percentage of sales.

Ultimately, while it‘s good to understand the overall lay of the land, you need to base your specific ad budget on your particular business situation and goals, not just do what others in your industry are doing.

Optimizing Your Ad Spend Allocation

Once you‘ve established your overall digital advertising budget, you need to decide how to divvy it up across various channels for maximum impact.

Search remains the biggest digital ad format, accounting for 41% of total US digital ad spending in 2022 according to eMarketer. Google Ads is the dominant player in search advertising and an important part of most companies‘ digital marketing mix.

Social media platforms are also hugely popular for digital advertising, with Meta (Facebook and Instagram), TikTok, Twitter and LinkedIn attracting major ad dollars. Format-wise, video advertising is hot and continues to grow rapidly.

Other digital ad types to consider include display advertising through programmatic ad platforms or ad networks, native advertising that blends in with on-page content, and digital audio ads on streaming platforms.

Your ideal ad channel mix will depend on your target audience and their media habits, your product/service and business model, and the comparative costs and conversion rates you see from each format. It‘s important to start with a diversified allocation, test and iterate, and adjust spend towards higher-performing channels and tactics over time.

Keep A Pulse On Performance

Speaking of iteration, one of the greatest benefits of digital advertising over traditional channels is the ability to track and measure results in real time. To make sure your ad dollars are driving the best possible outcomes, you must continually monitor core KPIs and optimize accordingly.

In addition to the essential metrics discussed earlier like ROAS and CPA, other important numbers to watch include click-through rates, conversion rates, quality scores that impact ad placements and cost, frequency and recency of ad exposures, and more.

There are tons of tools available to automate ad performance reporting and surface insights, such as native analytics in the ad platforms themselves as well as third party solutions that connect data across channels.

Use these tools to keep a close eye on what‘s working and what‘s not, and be ready to shift budgets from underperforming campaigns to high-achieving ones. For example, if you notice that your Facebook lead gen ads are coming in at a dramatically lower cost per lead than your LinkedIn campaigns, you may want to move some money from LinkedIn to Facebook to drive more efficient results.

At the same time, make sure to give campaigns sufficient time to generate enough data to make statistically significant assessments before pulling the plug or making major changes. Optimize based on clear patterns in the numbers, not knee-jerk reactions to short-term blips.

Balancing Ads With Organic

Finally, while digital advertising is an important part of an effective marketing strategy, it shouldn‘t be the only part. Paid channels work best in conjunction with solid organic marketing efforts like SEO, content marketing, social media, and email.

Organic tactics help you build trust, authority and lasting customer relationships in a way that paid ads alone often can‘t. They also tend to drive higher-quality, lower-cost traffic and leads than advertising in the long run.

So while you certainly need to invest sufficiently in digital ads based on the approach laid out here, don‘t forget about fueling those longer-term organic programs as well. Find the right balance for your business and integrate paid and organic strategies to achieve sustainable growth.

Bringing it All Together

There you have it – a comprehensive framework for determining how much you should really be investing in digital advertising based on your business goals and key performance metrics.

Remember, there‘s no universally perfect amount to spend on digital ads. You need to put in the work to set a budget that makes sense for your unique situation and continually optimize it based on results.

But if you align ad spend with revenue targets, understand your core numbers, allocate across channels strategically, and balance with organic efforts, you‘ll be well on your way to digital advertising success in 2024 and beyond.