A man who stops advertising to save money is like a man who stops a clock to save time. Henry Ford
First of all, there is no one size fits all approach. A start-up in a high growth category might be willing to invest a significant portion of their available budget in the early years to capture as much market share before more competitors enter the category. This might end up at 25% of their projected annual revenue vs. a highly competitive, shrinking category where a business might be more comfortable investing closer to the 5 - 8% range.
So we’re not going to give you an exact percentage or figure but what this article will do, is help to identify the factors that you need to consider in landing on your optimal social media marketing budget.
Let’s start with establishing what your broader monthly marketing budget will be, regardless of channel. The U.S. Small Business Administration recommends (sorry, I couldn’t find any Australian sources) spending 7 to 8 percent of your gross revenue on marketing. We’re not going to dive into the nuances of this rule-of-thumb today, but ensure you consider the relevance of this number for your business (i.e. margin, growth, market conditions).
Next, we need to determine what role social media marketing will play within your marketing channel mix. If it’s your only marketing channel, this is obviously a much simpler equation. It then just becomes about finding (and not hitting) your point of diminishing returns. We also won’t go down the rabbit hole of your other potential marketing channels, as it’s subjective and dependent on a range of factors.
What we will pose to you is this - what if we could track each transaction, and you know the exact amount that acquiring a customer cost you, as well as the money you made on that transaction? In this instance, with the correct data and tracking, you’ll be able to scale your business as quickly as you please. Such is the specificity of social media marketing and analytics (even more powerful in conjunction with your website and customer data).
As long as your cost per acquisition is at a level you’re willing to absorb, you’ll soon be able to test and learn to see which channels, post types and sales mechanics work best for you. For example, you might find (as we have) that Instagram is more efficient at driving brand awareness, and that alone is enough to see a significant return on ad spend (ROAS). Similarly, you might also see that Facebook is more efficient at driving foot traffic in-store. Soon, you’ll uncover what budget drives what outcome and in turn, start to plan your marketing budget based on your sales objectives.
Here’s an example, showing a social media driven e-commerce campaign. Let’s assume that Tim is selling shoes online for $50, of which $40 is profit.
A Facebook post reaches 100,000 people at a cost of $500
5000 people click through to the online store (i.e. 5% of those reached)
50 of those go on to convert / buy (i.e. 1% of website traffic)
This is a return on ad spend of 500% and a profit of $1,500 (50 x $40 = $2,000 minus ad spend of $500).
If Tim were to do this four times per month with the same results, we can see how his monthly budget of $2,000 will enable him to hit his social media revenue target of $10,000.
We often talk of a test-and-learn approach to media spend as the best way to identify your ROAS benchmark over time. You’ll soon have a solid understanding of the most efficient means of social media advertising for your business and industry.
Of course, if you'd like help navigating the world of social media marketing, please reach out.