- The goal of any ad strategy
should be to get a positive return on your investment,
which comes down to whether you're getting more revenue
out of the ad campaign
than the cost that you're putting in.
So how can you determine
what your ad spend should actually be
to get the most return on your investment?
To start answering that question,
we'll need to understand the bidding system
used by the ad networks.
So what's a bid?
A bid is the maximum amount of money
that you're willing to pay
for a desired action on your ad.
If it sounds like an auction,
that's because it is an auction.
Ad networks have limited amount of ad space,
and to determine whether your ad
or the ads of your competitors
are shown to your target audience,
they run an auction to see how much each advertiser
is willing to pay for that ad space.
Think of it like an auction,
the highest bidder wins.
Let's say that you bid $10 for a click on your ad,
and the next highest bidder
only pays $5 for a click.
Each ad network will only make you pay
the lowest amount possible to win the bid.
In this example,
you might be willing to pay $10,
but in reality, you'll only have to pay $5 and one cent
to win the bid.
Winning this auction,
in addition to the overall quality of your ads,
will determine how your ads are displayed
on the different ad networks.
So how should you determine what your maximum bid should be?
To do that, we'll want to work backwards
from revenue generated by your final bid.
We're about to look at an example
from a hypothetical B2B company,
but the thought process can be applied to any industry.
Be sure to keep that in mind.
Let's say that you run an IT solutions company,
and you wanna advertise for your upcoming webinar
on network security.
Fantastic.
Let's do some math.
The first thing that you'll wanna do
is to calculate your lifetime value of your customers.
There are a number of ways you can do this,
but to get a simple average,
here's how you could calculate it.
Take the yearly revenue your average customer brings you,
and multiply it by the average lifespan of that customer.
Throughout this example,
we're gonna do calculations using dollars,
but this same logic applies for all currencies.
So if your average customer pays you $500 a year,
and your average customer stays with your company
for six years,
we can say that the average lifetime value of a customer
is $3000.
But let's not forget how much it costs
to service a customer.
If you factor in that it costs you $50
to service that customer each year,
or $300 over their entire lifetime as a customer,
you can say that your average lifetime value
of your customer
is $3000 minus 300, or $2700.
Since our budgeting goal
is to have a positive return on our investment,
$2700 will be our breakeven point
for our maximum budget on our ad spend.
Now that you have your average lifetime value
for your customers,
you can work backwards
to see what your monthly advertising budget
should actually be.
We're gonna walk through this example,
focused on the value of a form conversion,
but you can apply this same approach
to whatever conversion points
that you're optimizing your ads for.
So what factors matter in your advertising budget?
You'll wanna consider two things
to figure out your advertising budget,
your average conversion rate
and your average lead-to-customer rate.
The average conversion rate
is the rate at which website visitors to your site
convert on a form and become a lead.
In our example,
this will be what percentage of people clicking on your ad
will actually sign up for your webinar.
Let's say that for our example,
you have a 7% webinar conversion rate.
We'll use this approximation for now,
but take a look at your own site's traffic
to see how your landing pages are currently performing
and what your own conversion rate actually is.
It's okay to start with a rough estimate,
and then refine that over time
as you start getting real data.
So what's an average lead-to-customer rate?
The average lead-to-customer rate
is the rate at which leads become paying customers.
In our webinar example,
this is the percentage of people
who sign up for your webinars
will actually become customers later on down the road.
You'll need to look at the historical data
for your campaigns
to determine the specific number for your own business.
But for our example,
let's say that your lead-to-customer rate is 10%.
So if 10 people sign up for your webinar,
you can expect that one person
will become a paying customer.
Once you start getting real data
from your specific ad campaign,
you can start adjusting your estimates to reflect reality.
You have a lot of stats assembled now.
7% is your average conversion rate,
or the percentage of website visitors coming from your ad
that will convert into a lead on your landing page.
10% is your average lead-to-customer rate,
or the percentage of people who signed up from your webinar
that will eventually become a paying customer.
$2700 is your lifetime value,
or how much each of those customers
is worth to your business.
Now, you can work backwards
to figure out what an ad click is actually worth to you.
If you divide one new customer
by your lead-to-customer rate,
you'll see that we need 10 webinar signups
to yield one new customer.
Next, divide the number of webinar signups we need
by the average conversion rate.
Using our 7% conversion rate,
we find that you only need roughly
143 clicks on your ad
to generate one new customer.
If that customer is worth $2700 to you,
we can start to calculate how much you should spend
on each click of your ads.
If we ignored all of their costs
of acquiring a new customer,
then your breakeven bid
would be your customer lifetime value
divided by 143,
the number of clicks that you need
to generate one new customer.
This means that you could bid $19 per click on your ad
and break even.
Now, let's say that you launch this ad campaign,
run the webinar,
and you wanna understand how well your digital ads
actually performed on revenue 90 days later.
This is where return on ad spend comes in,
also known as ROAS.
Return on ad spend is a calculation
that helps you understand
the actual return on investment for your advertising.
To calculate ROAS,
take the revenue driven by a campaign
and divide it by the amount of money spent on that campaign.
These insights can be used
to prioritize the types of ad campaigns
that bring in the highest return on investment
in the future.
As you continue to iterate on your advertising strategy,
you'll be able to determine
how long you need to run your ads
in order to reach your goals
and what your daily ad spend should actually be
for that result.
The advertising networks are making it easier
to determine how you can manage your ad spend,
but the exercise that we just went through
is a great way to determine your advertising objective,
what achieving that objective is worth to you,
and how all of that fits into your overall marketing goals.
(upbeat music)