Creating a budget for your Facebook and Instagram ads shouldn’t feel like witch-craft. I’ve seen it too many times: a dash of this is how much we think we should spend, combine with two large heaps of we really have no idea and mix well over two shots in the dark. Your Facebook and Instagram budget doesn’t have to be a recipe for disaster.
Depending on where you are with your e-commerce business – and the baseline you’ve built for your digital advertising, there are a few different ways to back into a strategic social advertising budget.
Approach 1: Create A Budget Based On the Cost Of Your Product
Who is this for? Brands who don’t have a baseline data of their return on ad spend or cost per acquisition.
When you’re just starting off with advertising and want to set yourself up for success, your daily budget should be 5-7x the value of your average conversion. If you don’t know your average order value (AOV) we can simplify this by using the cost of your most popular product.
This gives Facebook a chance to find the people most likely to buy your product without limiting the algorithm to spiral and spin in the learning limited phase while not giving you the data you need to actually build a baseline and make the platform work for you.
Here’s how it works:
For example if you’re selling sweatshirts for $50 – an ideal daily budget would be 5-7x that, roughly $250-$350 daily. If you’re selling multiple products or if people buy more than one item – look at your average conversion value, and not just the price of your product.
The reason why we recommend this is because Facebook needs roughly 40-50 purchases over 7 days for the campaign to optimize when running a purchase conversions campaign. Using the above example, you’d need ~6 purchases/ day on your ads for your campaigns to move past learning and limited learning phases. Ideally, you’d get more than that, and if your average product is $50 – you need more than let’s say a $50 daily budget to get desired and realistic results.
- A great bench mark for new brands who have never advertised before and might not know their return on ad spend (ROAS) or cost per acquisition (CAC).
- Gives you enough budget to push past learning phases and gain statistical significance to grow your businesses
- You won’t wonder if you’re spending enough to test your baseline – if this budget doesn’t get you the conversions you want – you can make immediate changes like testing new ad creative or audiences.
- Way better than the “let’s test $1500/month” method because it guarantees you enough spend to gain actual product-market fit insights
- When you have no baseline, your digital advertising goal should be to break even while you essentially buy data, and then grow your audience, insights and sales from there. If you don’t spend enough, you won’t be able to gain the data you need to grow.
- You’re able to run purchase conversion campaigns and not just brand awareness or traffic ads – which is great for e-commerce brands who have a short (1-5 day) sales cycle.
- Can be a bigger budget than new brands are willing to spend.
- You have to have the know-how of setting up campaigns so you can get insights and right away.
- Not always sustainable for new brands who don’t have a “winning ad” and/or “winning product” yet.
- If your store doesn’t have a lot of sales data – the algorithm will have a hard time building the customer profile most likely to purchase
Approach 2: Optimize Your Budget For Return On Ad Spend (ROAS)
Who is this for? Brands who have a Facebook & Instagram advertising baseline
This is one of my favorite ways to approach a digital budget because you’re making your revenue goal a priority, and are able to adjust your spend daily or weekly while keeping that goal in mind so you don’t waste your budget, and also so that you don’t leave money on the table.
Here’s how it works:
If you want to target $100,000 in monthly revenue from your Facebook and Instagram ads and your average return on ad spend (ROAS) is 3X, meaning that for every dollar you spend on ads you’ll return 3 dollars of revenue, you’d need roughly a $33,333 monthly budget to hit your $100,000. With this method you’re looking at an overall average – while a repeat customer might convert at 7-8X, a new customer might convert at 2X. You’re also taking into account your business’ unique ROAS goals. Some brands might be able to get away with a 2X return on ads because they have great margins and repeat customer rate, while other brands might need to target a 5X return to remain profitable.
- You’re able to start with a monthly budget but scale up or down throughout the month while hitting your target goal
- You can really dig into your margins, repeat customer and growth goals and discover a budget that works for your unique business
- You can back into a yearly budget with a yearly revenue goal, and then set monthly budget goals based on seasonality and consumer habits
- You can scale up and down based on your results
- You need to have benchmark data for your average ROAS
- Seasonality can affect ROAS day over day and month over month depending on your product
- You’ll need to have the know how where to spend the budget on upper, middle or low funnel
- You’ll need to have the know how on where to increase and decrease budget to not leave money on the table and not waste money day in and day out
- If you focus narrowly on ROAS you can leave money on the table while trying to grow
Approach 3: Optimize Your Budget Based On CAC
Who is this for? Brands who are focused on new acquisitions.
Another way to calculate your social advertising budget is backing into it by basing it off your customer acquisition cost (CAC). ROAS might not be as important for you as CAC if the first purchase pales in comparison to your customer’s total lifetime value.
Here’s how it works:
The CAC can be calculated by taking your ad spend for acquiring customers and dividing it by the number of customers acquired during that period. For example, if you spend $30,000 on your top funnel to acquire new users in a month and get 300 new customers, your CAC is $100. From there if you want to generate 10 sales in a day, your Facebook budget needs to be 10-12X your CAC.
- CAC can be more predictable than ROAS
- Great for brands focused on COGS (Cost of Goods Sold) because it gives you an upper ceiling for what you can spend per customer
- Easily able to understand a short term change in ad performance
- Need a CAC and LTV baseline
- CAC doesn’t give you the comprehensive gauge of profitability
You shouldn’t feel like you’re gambling with your digital advertising spend. Which is why approach 1 is about buying valuable insights and data, and approaches 2 and 3 are about maximizing profits and growth.
Looking for more help on how to create a Facebook and Instagram advertising budget? Book a free strategy call and we’d be happy to further discuss how to approach a budget for your unique online business.