We all know Return on Investment, known as ROI, is measured by calculating the difference between what you invest into something against the return you get back. Unfortunately, this concept gets messy when it comes to advertising and marketing, especially integrated marketing initiatives that include intangibles like branding, public relations, SEO and content marketing.
Separate Your Marketing Budget from Your Advertising Budget
First, let’s be clear that marketing and advertising are not synonymous, though many people tend to use them interchangeably. Advertising is a component of your marketing plan, and it should be a portion of your overall marketing budget. Most companies also include organic marketing techniques like SEO, earned social media, art production costs, packaging for tangible goods, website design and development, and more, as part of the entire marketing budget.
To figure out how much you need to spend on advertising, we must first determine your marketing budget. While many people use different formulas, let’s go with the fundamental, most universal method, which uses a percentage of the company’s gross revenue.
The recommended percentage ranges between 8% and 20%. Do a little research to determine what is the standard percentage for your industry, as each is different. Unless someone makes a compelling case to the contrary, I typically go with a nice, easy to work with, 15%.
The exception is usually for start-ups. In that case, marketing investments are always higher the first three years as the business gains momentum. Since start-ups don’t have revenue yet, a portion of the start-up capital should be used.
Your Advertising Budget Calculated from Your Marketing Budget
Now that you have a number for your marketing budget, set aside a quarter to a third of it to cover actual advertising and media buys. This is your advertising budget—the amount spent to run PPC campaigns, social media advertisements, lead generating campaigns, and campaigns that lead to sales, acquisitions, or a desired conversion.
If you are spending 15% of your revenue on marketing, no more than 5% should be strictly dedicated to advertising.
Your Return on Advertising Spend—or ROAS
With your budget in place, it is now up to you or your ad manager to maximize the Return on Advertising Spending—also known as ROAS. The standard ratio is 5:1. This means that your return should be five dollars for every one dollar spent.
The ROAS formula is also good for agencies or advertising managers who might not be privy to all the budget numbers. A firm may not want to reveal to outsiders or employees the actual costs and margins associated with the business.
Being able to calculate the ROAS gives anyone a baseline to use to evaluate the success of advertising campaigns. I may not know my client’s total marketing budget, but if they give me ten dollars to spend on advertising, and I give them $50 in gross sales as a result, then I know I’ve done my job.
Ultimately, a good advertising campaign is supported by, and in turn supports, branding, public relations, social media and content strategies. By working together, all the components of a marketing plan must leverage advertising budgets to produce the highest-yielding results.