How Much Should You Really Spend on Digital Advertising in 2024?
It‘s the perennial question on every marketer‘s mind as they plan their strategy and budget for the year ahead: "How much should I allocate to digital advertising?" If you‘re hoping for a simple, universal answer like "spend $X per month and you‘ll crush your marketing goals!", I‘m sorry to disappoint. The reality is, there is no perfect ad budget that applies to every business.
However, while I can‘t give you a one-size-fits-all dollar amount to spend on digital ads in 2024, what I can provide is a helpful framework for determining the ideal ad budget for your unique business. By the end of this post, you‘ll understand how to use historical data and strategic thinking to arrive at a digital ad spend that will allow you to hit your goals and maximize the impact of every advertising dollar.
Here are the key factors you should analyze and consider when deciding how much to spend on digital advertising in 2024:
1. How much ad spend is required to achieve revenue targets?
The goal of most businesses is to drive sustainable revenue growth over the long-term. Therefore, the best place to start when determining digital ad spend is to work backwards from your company‘s overarching revenue goals.
Looking at the historical revenue contributions from marketing can help you assess what portion of revenue marketing efforts, including advertising, will be expected to generate. For example, if the business has a goal of increasing revenue by $500,000 this year and marketing has typically been responsible for influencing 20% of revenue, then marketing‘s target becomes generating $100,000 in revenue.
From there, look at what percentage of marketing-influenced revenue came from paid digital ads in the past. If digital advertising drove 25% of marketing revenue last year, then it would need to produce $25,000 of the $100,000 marketing revenue goal.
Finally, determine your average return on ad spend (ROAS) from previous campaigns. If your typical ROAS is 5:1, meaning you generate $5 in revenue for every $1 spent on ads, then you‘d need an ad budget of $5,000 for the year to hit your $25,000 revenue target from digital advertising ($25,000 revenue / 5 ROAS = $5,000 ad spend).
2. What percentage of the marketing budget can realistically be allocated to advertising?
Of course, having a $5,000 digital ad budget does you no good if $5,000 simply isn‘t available based on your cash flow and profit margins. It‘s crucial to be realistic and only allocate what your business can truly afford to spend after accounting for other essential costs.
For newer businesses or those exploring digital advertising for the first time, you may not have past ad performance data to calculate ideal spend as described above. In that case, look holistically at your finances and consider what you‘re comfortable investing in this still unproven channel for your business. It‘s okay to start small and adjust as you gather data on what works.
The key is to set an ad budget that you can consistently maintain, as starting and stopping campaigns due to cashflow issues inhibits your ability to drive sustainable long-term growth and results. Be honest about what you can afford now, with an eye on increasing budgets incrementally as ads start generating returns.
Even with a small budget, paid advertising can still play a role in your marketing mix. But you‘ll definitely want to focus on optimizing other business metrics, which we‘ll discuss shortly, to maximize the impact and efficiency of every dollar.
3. What is your average customer lifetime value?
Customer lifetime value (LTV) is the total amount of revenue a customer represents over their entire relationship with your business. Increasing LTV is one of the best ways to increase your available ad spend.
To calculate LTV, take your average annual revenue per customer and multiply it by the average customer lifespan. If your typical customer pays $250 per year and remains a customer for 3 years, their lifetime value is $750.
However, you also need to factor in the costs to service that customer. If it costs $50 per year to support a customer, their net LTV is actually $600 ($750 revenue – $150 service costs).
The higher your LTV, the more you can afford to spend to acquire a new customer. If your current ad budget feels constrained, explore strategies to improve LTV, such as:
- Implementing subscription or recurring revenue models
- Increasing average order value with upsells, cross-sells and bundles
- Improving customer retention and repeat purchases
- Expanding your product catalog to enable greater share of wallet
By increasing how much revenue you generate from each customer you acquire via advertising, you‘ll improve the return on ad spend and make the investment more viable and profitable.
4. How strong are your conversion rates?
The next factor that impacts how far your ad budget will take you is the conversion rates of your website or landing pages. You need to look at two key metrics here:
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Your visitor-to-lead conversion rate (i.e. the percentage of ad clicks that convert on your offer)
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Your lead-to-customer conversion rate (i.e. the percentage of leads that become paying customers)
For example, let‘s say you have a 10% visitor-to-lead conversion rate and a 5% lead-to-customer rate for your campaign. This means for every 1,000 people who click your ad, you generate 100 leads. Of those 100 leads, 5 become customers.
If your typical customer LTV is $600, those 5 new customers represent $3,000 in revenue. Since it required 1,000 ad clicks to produce that $3,000, your effective revenue per click is $3.
Therefore, your breakeven ad bid would be $3. Anything higher and you‘re spending more to acquire customers than they‘re worth to your business. But if you can increase conversion rates, you‘ll tip the scales in your favor.
Improving your visitor-to-lead conversion rate to 15% means you now generate 150 leads from those same 1,000 clicks. Assuming lead-to-customer rate stays at 5%, you‘re gaining 7.5 customers ($4,500 in revenue) instead of just 5 ($3,000 in revenue). Your allowable ad bid rises by 50% to $4.50.
Increasing lead-to-customer conversion rates has a similar effect. A jump from 5% to 7% means those 1,000 clicks and 100 leads turn into 7 customers ($4,200 in revenue) rather than 5 ($3,000). The revenue per click and breakeven bid goes up to $4.20.
Optimizing conversion rates amplifies the impact of every advertising dollar spent. Before raising ad budgets, focus on conversion rate improvements through:
- A/B testing ad creative and copy
- Optimizing campaign targeting
- Enhancing the landing page user experience
- Improving lead nurturing and follow-up
You‘ll acquire more customers from your existing budget and have more money available to scale your best-performing campaigns.
5. How frequently are you evaluating performance and adjusting ad spend?
Your ideal digital ad budget is not a "set it and forget it" situation. As with any investment, regular analysis and rebalancing is needed to ensure optimal results.
I recommend a quarterly evaluation cadence to:
- Collect sufficient performance data to identify meaningful trends
- Make educated decisions about where to reallocate budget for maximum impact
- Adapt to evolving business needs and market conditions
- Align ad strategy and spend with your most current revenue goals
During these evaluations, think critically about the full-funnel impact of your digital advertising and how you can adjust budget and optimize performance at each stage:
- Are you investing enough at the top of the funnel to build adequate awareness and drive new prospects into your pipeline?
- Is your spend balanced with corresponding investments in the middle and bottom of the funnel to nurture and convert the leads you‘re capturing?
- Which campaigns, channels, and tactics are your top performers that warrant additional budget?
- What‘s underperforming that should be paused or eliminated to free up budget for higher-ROI initiatives?
Maintain an agile approach and don‘t be afraid to experiment with new ideas while doubling down on proven winners. Proactively manage and maximize your ad budget to achieve your goals faster.
The Optimal Digital Advertising Budget is Unique to Your Business
I hope this framework has made it clear that there is no universally perfect answer to "How much should I spend on digital advertising?" Every business must arrive at their ideal ad budget by working backwards from revenue goals, accounting for available funds, and focusing on the efficiency of their funnel. What works for one company could be far too much or too little for another.
The key is to think holistically about how paid advertising fits into your complete marketing strategy and use the levers you can control—LTV, conversion rates, middle and bottom-funnel nurturing—to get the most from every dollar spent. With an experimental mindset and a commitment to regular optimization, you can find the digital ad budget that enables your business to achieve its revenue potential in 2024 and beyond.
