I often get asked this question – What is an ideal digital marketing budget? What should we expect as a return on investment?
As much as I would like to give definitive numbers, the answers vary based on your growth stage, the competitor landscape, and current brand equity.
There are two critical metrics you should understand to help you determine your digital marketing spend and analyze the results:
- What is your Customer Acquisition Cost (CAC)?
- What is the Return on Ad Spend (ROAS)?
While both metrics measure aspects of a business’s financial performance, they serve distinct purposes.
Customer Acquisition Cost (CAC) represents the total expense of acquiring a new customer. This includes all marketing and sales costs, from advertising and promotions to salaries and tools. CAC provides a comprehensive view of the investment required to bring in new customers, helping businesses assess the efficiency of their overall marketing and sales efforts. A lower CAC indicates that a company is acquiring customers more cost-effectively, which is crucial for long-term profitability.
Calculate your cost of acquiring a new customer by adding up the total Ad spend + Resources employed + Other marketing spend + cost of Tools used to close a sale.
On the other hand, Return on Ad Spend (ROAS) specifically measures the revenue generated from advertising efforts. It calculates how much revenue is earned for every dollar spent on ads, offering insight into the effectiveness of a particular campaign. A higher ROAS suggests that the advertising spend is effective in driving revenue.
A good rule of thumb is that your ROAS should be twice that of your digital ads spend. For example, if you are spending $1,000 on ads, you should be generating $2,000 in revenue within 3-4 months.
Understanding and effectively managing your CAC and ROAS is crucial for optimizing your digital marketing budget and ensuring long-term profitability. CAC helps you gauge the cost-effectiveness of acquiring new customers, while ROAS measures the direct revenue impact of your advertising efforts. Balancing these metrics is essential for maximizing your return on investment (ROI).
With your current marketing activities, I encourage you to find the CAC and ROAS. These two metrics will help you invest your marketing dollars in the right place at the right time for your future marketing efforts.
Reach out to our team if you would like help planning your digital marketing budget.
