how to determine what your ads budget is going to be in your business
I want to start by saying that of course you do not have to do paid ad spend.
That’s not a necessary requirement of running an online business, but it can help.
It can help your business grow and it can help your business scale.
And we need to understand that when we are running ads, we need to get a positive return. That is absolutely imperative.
There are some key numbers that we need to know in order to make sure that we are going to do that.
One, what is the lifetime value of your customer or client.
How much do people typically pay you over the lifetime they are with you?
Now, I understand that every person is different and some people might stay for three weeks and some people might stay for seven years. But you need to understand what the average lifetime value of your client is. And that will also be changing all the time. But you need to be able to calculate this.
Now, how you can work out what the average lifetime value is, is by looking at all the sales revenue that you have made since your business began. You can tally that up, look in your accounts, tally up the total revenue that you’ve made, over the entire period that your business has been in existence. And then, look at the number of people you have served over that time. Tally that up. You may have that somewhere listed on a separate spreadsheet, you might have that you know you might be able get those details out of your accounting software. Whatever that is, find out the total number of people you have served over that lifetime, divide one by the other, you’ve got your average lifetime value of a client.
This is a really good number to keep track of consistently as well. It is a good number to know when you are thinking about advertising at all. Because if you know your average lifetime value of a client, it may make you think slightly differently on how much money you are willing to spend to get one in the door.
You also really ideally need to know your conversion rate is.
And that is leads versus the number of calls, fitting calls, sales calls, whatever you call them. And then sales calls to becoming a customer or client. So you need to know those numbers, what’s the percentages that convert at each stage.
That is incredibly important to know because if you don’t understand that number, then it makes it really hard to get to grips with how much you should be spending on ads. Because you don’t know what you’ll convert at therefore you can’t possibly know what you can spend. So you need to understand that number as well.
Another thing we need to know is the clients initial transaction value is.
So, let’s say that our lifetime value is £10k. But let’s say that typically they spend £50 with us now and £50 with us next month, and they spend, £9.5k in four years time.
That doesn’t mean that, you know when we look at that as the £10k number, we go, oh look, a client spent £10k with us, that means that we’re going actually have a lot here to spend on ads to get them in. But, you’re going have a cash flow problem, or a lack of cash problem if you end up at the beginning of the relationship with you they spend very little. If you forked out £5k to get them in the door, you’ve got a problem.
So, like I have just said, we want to make sure that we understand the average lifetime value of a client. We need to understand what that looks like in terms of payment frequencies, amounts, again, for the average client. I realise no client is the same. But what that looks like isn’t skewed in any way. We want to understand our conversion. What our conversion is from somebody finding out about us, joining our list, etc, to them paying money, to the cash landing in your bank account, what are those percentages along the way? What does that look like?
These are 3 key things you need to understand so that you can understand what your ads budget could be.
There is also a spreadsheet bundle that I have that can really help with these calculations – here is where you need to go to get hold of that.