As organic social media reach continues to decline and small business teams experience fewer people seeing and engaging with their content, many of our clients find success with social advertising (a.k.a. paid social media). While organic social media refers to the free distribution of your content on platforms like Facebook, Instagram, and LinkedIn, paid social media is an approach where we pay to display advertisements or sponsored marketing messages to a very targeted audience.

With paid social media, the money given directly to the platform distributing and showing your ads is referred to as “ad spend.” When preparing to use this channel to generate more leads and sales for our clients, a question we get asked frequently is, “What should my ad spend budget be?”

In this blog post, we’ll share two very common and popular ways to determine this number.

Method #1 – Slice the Pie

Think of your annual revenue as your favorite pie. Is it apple? Maybe cherry?

My mother-in-love makes the best buttermilk pies ever. They are so buttery, light, and sweet (Anywho… I digress.)

One way to calculate your ad spend budget is to consider your overall marketing budget as a percentage of total revenue. In other words, a slice of the revenue pie.

For many of our clients, the cost to acquire new customers falls in the range of 10 to 15% of their total revenue. Ten percent of their revenue is used to market, promote, and acquire new customers while the remaining 90% goes toward production, fulfillment, operations, etc.

For example, if your total annual revenue is $500,000, then ten percent of that (or $50,000) would be earmarked for marketing and customer acquisition. And a smaller portion or slice of that piece would be used for your social advertising budget.

Your overall marketing budget may include business development costs associated with networking and membership in professional organizations or mastermind groups. Plus, the costs to hire freelancers or agencies to support marketing tasks such as writing, graphic design, and social media management.

Your paid social media budget is just a sliver and may compromise only 15-20 % of your overall marketing budget.

Method #1 Recap – Slice the Pie

Step 1: Determine what portion of your total annual revenue will go toward marketing and new customer acquisition. We recommend 10% of annual revenue be earmarked for your overall marketing budget.

Step 2: Determine what portion of your overall marketing budget will go toward the social ad spend budget. Deduct all of the current marketing expenses from the overall marketing budget to determine what you have available for ad spend. Aim to dedicate 15-20% of your marketing budget for advertising.

Method #2 – Calculate Conversions

Got your calculator handy?

(This should already be out if you were following along for part 1 of this post 😁)

A second popular way to determine your social ad spend budget is to calculate your website conversion rate.

For our eCommerce clients, this calculation is simple because all conversions or sales occur online and typically within a very short period from the time the ad was seen. Our ROI measurement tools automatically track how many visitors come to the website and what percentage of those visitors become paying customers.

So, if your website conversion rate is 2% that means for every 100 visitors to your website, two of them will convert into paying customers. If your goal is to get 20 new customers, then we need to attract 1,000 visitors to the site. Here’s the formula:

Number of Customers Desired / Website Conversion Rate = Number of Website Visitors Needed

Twenty Customers divided by Two Percent (20/0.02) = 1,000

To get a prospect to visit your website from social media may cost anywhere between $0.50 to $5.00. Let’s use $2 to make the math really easy. In this case, 1000 website visitors at $2 each equals a $2,000 ad spend budget. Stick with us as we move onto the next formula:

Number of Website Visitors Needed * Cost Per Visitor = Ad Spend Budget

1,000 Website Visitors multiplied by $2 Each (1,000*2) = $2,000

For our lead generation clients, such as a B2B consulting or management service, a conversion is not an immediate sale. Instead, a conversion represents a prospect who fills out a form providing their contact information so that we may follow up and nurture them, which may lead to a sale later down the road.

The formulas above are the same except for lead generation clients, instead of setting a goal for new customers, we set a goal for new leads. The formula looks like:

Number of Leads Desired / Website Conversion Rate = Number of Website Visitors Needed

Method #2 Recap – Calculate Conversions

Step 1: Based on how many new customers or leads you’d like to acquire and your website’s conversion rate, calculate how many visitors you will need to attract to the site.

Step 2: Determine your ad spend budget by multiplying the number of website visitors needed to achieve your goal by the cost you project you will pay for each visitor.

Which method above (Slice the Pie or Calculate Conversions) feels more easy and intuitive to you?

Do you have a different way of determining your ad spend budget for social media?

Perhaps more importantly, what will you do when your social media ads begin generating new sales and leads for your business?

If you’re a small business owner looking to partner with a team to improve your social media marketing results, reach out today for a no-cost, no-obligation consultation.