If you’re thinking about doing digital ads, you’ll want to calculate your profit margin, lifetime value of a client, and conversion rate to know how much money you can spend before you spend it.
Services like Google and Facebook make it seem easy to do your own digital ads. Spend $5 here or there and get results, right? But it’s a money grab on their part. They know there is so much more that goes into an effective marketing campaign than most small businesses can manage on their own. But if they can trick a handful of their billions of users to spend a few dollars, then they’re making a tidy profit every day.
That’s not to say digital ads don’t work. They do! But if you’re not a marketer, I DO NOT recommend attempting digital ads by yourself. There are so many factors that go into it, and marketing agencies are trained to optimize every piece.
Here are the general areas a successful marketing campaign covers:
- Creative, which includes copy and media assets like video or images
- Funnels, which includes initial audience, landing pages, calls-to-action, and follow up actions (like an email automation)
- Tracking, which includes adding code to individual pages and events through your funnel. This can be as simple as a general pixel to your site or as complex as specific code to track actions like whether someone clicked a button or scrolled on the page a certain amount
- Trafficking, which includes setting the parameters of the ad like who to target, the budget, and what creative assets to include
- Monitoring, which includes looking at all the previous actions and ensuring they’re working to convert or make adjustments as needed
- Not to mention branding and audience management… it’s a lot!
If that seems overwhelming, don’t worry about it. You shouldn’t be doing your own digital ads because marketing agencies are trained to do this for you.
What I want you to do is CONSIDER digital ads by discovering what you can afford to spend on the campaign. To know your budget, you’ll need to know your profit margin on a product/service, the lifetime value of a client, and your conversion rate.
Ready for some math? Let’s dive in.
In very simplified terms, if you have a product/service that costs $100 for a client to buy, but it costs you $60 to produce and deliver, then you have $40 of wiggle room. This, of course, is over simplified. But when you’re just getting started with digital ads and you don’t have a full-time CFO rocking your budget, this will suffice.
((Sale_price – overhead)/sales_price)*100 = profit_margin
In this example: ((100-60)/100)*100 = 40%
This means, for every sale we make, 40% is profit. Sweet!
We all know that clients tend to be repeat customers. And if you’re not getting repeat customers, then you should have a product/service clients can buy again and again. If you do have a product/service they can buy but they aren’t, consider working on your business and offerings – but that’s a different conversation.
That first $100 they spent is not the only thing they’ll spend with us. Let’s pretend 25% of our $100 clients buy, on average, 3 more items from us over the next several years at an average of $80 per transaction. But there’s more to consider. There’s also a chance that clients become an excellent source of referrals and on average, our client base are typically referring 1 new client for every 5 clients we have.
This, again, is over simplified. In reality there is a range of your clients that become repeat customers, and there is a bell curve of spending. But we want to just get a sense so we can decide if digital ads would be worth it for us. If you’re looking to really crunch the data on this, you’ll want to work with someone who specilaizes in uncovering these numbers.
But let’s get back to our example.
Our $100 sale, on average, turns into:
Initial $100 purchase + 0.25 who make 3 more purchases x $80 over several years + 0.2 new clients x $100 in purchases….
There’s more to this equation because those 0.25 new clients also have a percentage that become repeat customers and refer new clients. But let’s not go math crazy at this stage. We’ll just take that initial bit of data.
First_Purchase + (Repeat_Percentage * (Number_of_repeat_purchases * repeat_purchase_value)) + (percentage_of_referrals * purchase_value)
In our example becomes: 100+(0.25x(3×80))+(0.2×100)
The average lifetime revenue of one client is now $180 and the profit value of our one client is 40% of that $180, which is $72. Remember these are averages. Some are spending more or less, some are referring more or less. But we just want a sense of what we’re working with.
If the lifetime value and referral rate is too much to think of, then just consider one sale. How much profit do you make from one sale? Work with that number for a start and don’t worry at this point with lifetime value and referral rate.
The conversion rate is the percentage of people who enter your funnel and come out the end in a sale. We’ll over simplify your funnel for this purpose because we’re talking digital ads. Start with the top of your funnel. How many people visit your landing page or website or are in your audience on social media? Then the middle of your funnel is the percentage of those people who contact you for business or join your mailing list. The sales is what percentage of those that end up buying your product or service. In simple terms, the equation looks like this:
(Sales/Top_of_funnel)*100 = Conversion_rate
For most businesses, it’s a small number. Usually less than 4.85%, so don’t worry if it’s low. And this calculation is really super basic. There is way more data that goes into getting an accurate number. But for this exercise, we’re just getting an idea.
We probably want to keep most of our profits, but if we invest some of that profit, we can make more profit! Amazing how that works.
If our conversion rate ends up being 1%, then for every 100 people who enter our funnel, we land 1 sale.
Now we can decide how much to spend to acquire one client. We had $72 of wiggle room from each sale, so let’s decide to spend $22 to acquire each new client (or, 30.55% of our profits). That leaves us with $50 in profit from each sale! And we can confidently spend up to $22 to reach 100 people.
Now extend that a little further and decide how many sales you want to make.
If you want to make 100 sales this month, then you should consider spending $2,200 in digital ads ($22 per sale x 100 sales). And you can expect $5,000 in profit from that investment based on our earlier calculations!
That $2,200 doesn’t just cover the cost of digital ads to pay Google or Facebook/Instagram or other ad platform. You’ll need to consider the cost to traffic, design, and manage as well. But at least now you have a budget to take to your marketing expert.
If that sounded exciting to you, it’s time to save up your profits or get an investment to engage a marketing agency this year.
Here are some great women-owned businesses operating in Canada that we recommend:
Whomever you choose to work with, ask if they handle the campaign in full as part of their quote. From creative to monitoring and everything in between. If you have the bandwidth and budget for this, it’s going to explode your visibility this year!!
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