As a small business owner, finances are something you’re bound to be very stringent about. You are willing to spend money only if it’s worth it and has an ROI on your business. While Facebook is a good social media platform for business especially for brand awareness and to bring in new leads, getting Facebook budgeting right can be tricky.
You listened to your friends and various marketing gurus and invested in Facebook advertising but it is yet to show any tangible results. You’ve just ended up spending more time and money thinking it would generate better results. Now you’re frustrated and you’re asking everyone how much you should spend on Facebook advertising before you pull the plug.
While Facebook might be a popular medium for opinions, it’s a platform solely based on algorithms that are essentially math. Mathematics and artificial intelligence have no consideration for opinions. So what works for your friends might not necessarily work for you because your business and customer base is different.
Before getting down to calculating how much you should spend on Facebook advertising, ask yourself these questions.
- Is my ideal customer on Facebook?
- What is the lifetime value of the customer I hope to acquire from Facebook?
- How much am I willing to spend to acquire a new customer?
Let’s go through these questions to help you gain clarity on where your business stands at each of these points.
Is my ideal customer on Facebook?
Are you on Facebook for the sake of being on a social media platform or are you 100% sure that this is where your ideal customer spends their free time? While an online presence is very important for a brand, you must distinguish the differences between the two. If you know that this is where your customers are then coming up with a strategy and budget will help your business. But if it isn’t, you need to find out which channel your customer uses and focus your attention on that. There is no point in investing your effort and money on a platform that doesn’t reach your customers.
How much should I spend on Facebook? It is a frequently asked question by many but the answer depends on several factors including the nature of your business and customer base.
Essentially, there are two types of Facebook advertising: boosting a post that you’ve shared on your timeline and creating an ad specifically targeting your audience. Boosting a post gives you the option to select a budget, duration and audience according to the demography and location. However, a Facebook ad goes into more specific details where you can define the objective of your ad whether it’s to generate traffic or a lead to ensure that your money is spent on the goals you want to achieve for your business.
In short, you could spend $1 per day by boosting a post, because that’s the minimum Facebook would let you spend. If you do that for seven days and look at the data of its performance, you will know in just seven days for a small investment if your post is working for your audience or not. But if you’re looking to create Facebook ads then you need to know some key metrics to make sure you get the results you want.
Metrics you need to know before advertising on Facebook
The Lifetime Value of a Customer (LTV)
This number is basically how much a customer would spend on your business during his entire lifetime with you. E.g. – if you are a Yoga teacher, your client may come to you three times a week and pay you $10 per class – that would sum up to $30 per week and over a year it would $1500 if the client comes for 50 weeks. Now, most good yoga teachers tell us that they retain their clients for up to 10 years. Even if you retain the ideal client for 3 years the LTV is $4500.
Knowing this figure is extremely crucial for your business as it determines the profitability of the future relationship with a customer which will help you make better decisions for the growth of your business.
Often business owners don’t know the value of their LTV and hence make the mistake of not spending enough to acquire clients. The issue here is often we don’t achieve the potential of our business. For example, if the yoga teacher worked on the basis I only earn $10 per session then I don’t have much money to spend acquiring the customer. The LTV also gives you an insight into what your customers’ friends and family can bring into your business if you get your marketing and advertising right.
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How to calculate LTV?
There are many versions of calculating LTV, however because we want to focus on the ideal customer, here is the simplest way
Follow this step by step guide.
A. What’s the value of a transaction of your ideal customer
B. How many purchases would the customer make during a year.
C. What is the average lifespan of your ideal customer
LTV = A x B x C
Customer Acquisition Cost (CAC)
Once you determine your LTV, you need to find out the Customer Acquisition Cost (CAC). This number will indicate how much you should spend on advertising, in this case on Facebook.
The simplest formula for this is,
CAC = MC / CA
MC = Marketing costs CA = Customers acquired
MC and CA need to be calculated from the same time. To determine a more accurate number, consider all marketing costs, including salaries and expenses on events.
Now that you’ve learned the Lifetime Value of a Customer as well as the Customer Acquisition Cost, let’s find out how you can use these numbers to figure out your Facebook budget.
E.g. – If you receive five leads and one is converted to a customer, your conversion rate stands at 20 per cent. Let’s assume that your Customer Acquisition Cost is $30 and that a Customer’s Lifetime Value is $1000.
If your monthly goal is to convert 5 new customers, you would need a total of 25 leads. So consider these numbers and calculate your Facebook Budget for a month.
Customer Acquisition Cost ($30) X number of leads for a month (25) = Facebook budget ($750)
If you invest $750 a month, you may get 5 new customers with a lifetime value of $1000 each, totaling to $5000.
If you think this number might be too steep for you especially if you haven’t had any leads in the past, start with a lower budget and then scale up depending on how well the campaign performs. Now that you have a clear idea of some of the key metrics of your business, you will be able to make budget adjustments backed by data instead of random guesses and gut feeling.
Important factors to consider
- If your Facebook adverts send the buyer to a website – it’s important that the website has a good track record of converting these visitors to leads and sales. Driving traffic from advertising to a website that is not converting this traffic to leads defeats the purpose. Hence it is important to test and ensure the website is converting the traffic before you start spending. As the ability for your website to convert the traffic increases your advertising budget gets even more optimised and will save you more money.
- The conversion of your Facebook advert is also about the quality of the advertisement and its relevance to your ideal customer. Hence spending time to get your advertising strategy right, and then testing iterating will derive the best results.
Calculating these numbers is easy but you need to give it time to generate the results you want. There isn’t one formula that will work for all businesses, so take time to test, review and fine-tune your Facebook campaign and budgets frequently till you get the results you want to see. If you’re looking for tips on Facebook strategy, check our online learning sessions with Digital Marketing Expert, Dinesh De Silva.
Disclaimer: The numbers provided are as examples for your guidance. Exact figures for each business differs based on multiple factors including industry, geography and competitive positioning. We recommend that you work with a Digital Marketing Agency in Sydney, who can provide you with guidance, calculating these important figures to your specific business.