January 27, 2020

A Different Way To Think About Ad Budgets

Nick Schenck

The way many companies set and manage their ad budgets is suboptimal. 

If you’ve ever been forced to pause a ROAS-positive ad campaign because you reached your max ad spend, then you get it.

Companies risk leaving money on the table by strictly enforcing an arbitrary, predetermined ad budget that is disconnected from their actual, real-time advertising performance.

There’s a better way.

A Better Solution For Ad Budgets

When companies set strict ad budgets, it’s symptomatic of a larger issue. They do not understand (or trust) the key metrics or levers behind their ad spend. They probably don’t have a solid handle on their incremental performance, either. 

For many companies, it’s not their fault. Maybe they’ve never run ads before, so they don’t have enough data to draw conclusions. It’s common to have tracking or measurement issues as well. If customer acquisition is not a company’s core competency, finding the right agency or talent to provide the answers also can be difficult. Sometimes it just takes a while to become confident that your day-to-day ad performance is affecting your bottom line. 

The prudent approach is to reach a point where you trust these metrics (see below), set clear performance guardrails, and then pause ad campaigns only when your campaigns exceed your performance targets.*

  • Conversions: The leads or purchases attributed to your ad campaigns.
  • Revenue: The revenue from these conversions must be passed back to your dashboard.
  • Return On Ad Spend (ROAS): This is: (Revenue / Ad Spend)
  • Customer Acquisition Cost (CAC): This is: (Ad Spend / Conversions)

Help Your Finance Team By Providing Context

Every finance department wants some sense of projected ad spend. With enough historical data, you can help them. For instance, if revenue from sales generated by paid media historically has accounted for 15% of company revenue, then you can use forecasted revenue to back into an approximate ad budget.

Typically, finance departments will have an annual forecast, and then each month they will follow a re-forecasting process to create 11+1, 10+2, 9+3, etc. budgets. This is helpful because a lot of factors can influence your ad performance in a short period of time. Variables such as seasonality, competition, algorithm changes, and ad creative may cause significant fluctuations in your ad spend.

Build trust and rapport with your finance team by communicating regularly (i.e. set a weekly reporting cadence, build them a self-serve dashboard to monitor performance, etc.) and testing your ad campaigns to poke holes in assumptions and reconfirm the data that you’re using to set your performance guardrails. 

Just don’t get in the habit of using a set-in-stone ad budget. It will set a ceiling on your performance unnecessarily.

*Your finance dept. may have alternative uses of capital that could require you to pause campaigns even if they’re performing within the guardrails.

Also, be careful that the guardrails you set are actually moving the needle. We’ve seen situations where ad campaigns are performing well, but the company’s top-line revenue isn’t moving. When ad campaigns account for a bigger slice of a pie that isn’t growing, that’s a problem. It indicates your campaigns may be cannibalizing other non-paid acquisition channels. Here’s a solution.