Why you need to set and stick to a monthly advertising budget
Many early stage companies that we speak with don’t have an advertising budget. When we ask, the typical response is something along the lines of “I don’t know, how much should we spend?”
And the answer to the question is complicated. Here are a few questions to ask yourself when deciding on a monthly ad spend budget:
1) What are your alternatives for acquiring customers and what does that cost?
2) How quickly do you want to grow?
3) How much cash on hand do you have?
4) What is your monthly P&L look like without advertising?
5) What is the long term value of a new customer?
6) Is your value proposition and conversion/sales process fully optimized?
7) Have you tested any advertising before?
8) What is your risk tolerance?
Answering these questions can help you get to a number that you can be comfortable with.
But you may be wondering, why do I need a monthly budget to be set at all?
1) To set a scope of possible tests
If you don’t know your budget, it will be hard to know how many different channels, ad creative, copy, targeting methods, etc to test. With $1,000, you won’t be able to test as much as you will with $10,000.
2) To give yourself time to go through enough optimization cycles
Creating a profitable advertising system takes time. If you have a one month horizon, you won’t give yourself enough time to deploy, analyze, optimize and improve.
3) To give potential customers multiple chances to be reminded that you exist
Purchases almost never happen on the first interaction a consumer has with a brand. It can take months and tens of interactions (across many channels, not just advertising). If you cut off your advertising spend early, you won’t have the ability to get in front of these consumers over the course of multiple months.
4) To allow you to understand what really is affecting performance
If you start and stop your advertising efforts, it can be very difficult to truly understand what factors are determining performance. For example, if you run a one month test but it turns out that that month is slow for consumers in your market, how will you know that this failed test wasn’t just a seasonality issue? Or maybe your onboarding funnel was messed up. You can only tell if that was the culprit by controlling for your ad spend before and after any site change. Otherwise, how can you know if it was an ad issue or a site issue?
Hopefully this gives some color into how and why you should think about setting a monthly advertising budget. Even if it isn’t much, it can help you plan your business and maximize your ability to learn and therefore your potential for success.
