One of the most common questions we are asked when it comes to online marketing and advertising is, “How much money should I spend advertising online?”
Unfortunately, that’s not easy to answer that has a quick response.
If you’re asking this question, you may need to start by setting up some simple tracking mechanisms and by doing some rough estimations to achieve a ‘CPA’ (Cost Per Acquisition).
We run into this all the time and it’s one of the most important hurdles to get through with our clients – not explaining what CPA is to our clients, but stressing that it is an important metric.
CPA is the single most valuable figure you can know before spending any money online.
Every business’ website should serve one main purpose – drive leads/generating revenue. If it’s not doing that for you then you shouldn’t be wasting your valuable time on it. So the real question becomes, “How much money should I be spending per lead?”
Defining Your CPA
To start, you’ll need to take a historical look back (a full year if possible) at the percentage of leads coming through your website that result in a sale.
You’ll then need to determine an average sale amount that resulted from those closed leads. The dollar amount that you arrive at brings you one step closer to determining how much you should be spending on driving visitors to your website.
Here is a quick example:
-Let’s say that 50% of the leads coming through your website result in a sale.
-We’ll say that your average sale amount is $1,000
This way we know that if you bring in 10 leads through your site – then 5 will probably close. This means ~$5,000 in sales.
So $5,000 in sales commissions resulted from whatever money you poured into sending traffic to your website.
Now, in order to get those 10 leads to come through your site we’ll say that you spent $2,000 in advertising costs. We just made this dollar amount up, but it means you’re now at $3,000 in “profit.”
So, if we take your $2,000 in ad spend that resulted in 10 leads, thus 5 sales that averaged out at $1,000 per sale, we just figured out exactly how much you CAN’T be spending per lead = $500
Technically, aside from the time you spend with your leads – using the example above – any leads for less than $500/lead would average out to be profitable.
This is obviously an extreme example to prove a point that if you can figure out your CPA and maintain it at a profitable level, then you can spend as much money as you want.