How to Decide on Your Facebook Ads Budget

How to Decide on Your Facebook Ads Budget

Before putting together a Facebook campaign, the first step is deciding how much budget you should allocate.

Because if you spend too little on a Facebook ad, chances are you are wasting your time and if you spend too much, it’s like pouring money down the drain. And that specific amount is very different for each advertiser.

So in this blog post, I’ll share with you the process to go through to find out that specific amount.

 

 

The first step is finding out your customer lifetime value or how much a customer is worth to you. In other words, the average amount of money a customer would typically spend with you in total.

If you only have one product at $100, and a customer usually only buys your product once, then your customer lifetime value is simply $100. But if you have several products, upsells and downsells, then calculating your customer lifetime value is more complex.

To calculate it, simply take the total amount these customers have spent with you over the past 12 months and divide it by the number of customers you’ve had over the past 12. You’ll have to make sure you don’t include any refunds or cancellations.

For example, if you’ve generated over the past 12 months $24,000 dollars in sales and have served 200 customers, then divide 24,000 by 200, which makes your customer lifetime value $120.

 

 

If you’re only launching your business now and don’t have that information yet, you will have to estimate your customer lifetime value.

Of course, if you plan to only sell one product, then you don’t need to estimate anything, your customer lifetime value will simply be the price of that single product.

However, if you plan to sell several products, you can roughly estimate that 10% of the people who buy your initial product, will buy your second product, and 10% of that 10% will buy your third product, etc…

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So for example, if your initial product is $100, and your second one is $1,000 and your third one is $2,000, your customer lifetime value would be $300.

 

 

The second step to discover what your Facebook ads budget should be is calculating your cost of sale. In other words, the cost of creating and delivering the product.

For example, if you sell a physical product at $30, and it costs $2 to manufacture and $5 for shipping and handling, then the cost of sale would be $7. Other costs of sales could be anything from staff payroll, taxes, fees, storage, insurance etc…

So if your customer lifetime value is $300, and the costs involved are $50 per customer, deduct the costs from the customer lifetime value, which would be $250 in this example.

 

 

The third step to discover what your fb ads budget should be is knowing what you’d like your profit margin rate to be. In other words, what percentage of the revenue you make you’d like to consistently allocate as profit for your business. Profit margins vary considerably from one industry to another.

For example, in the restaurant business, profit margins are typically 3 to 5% whereas in the skincare industry, profit margins are typically 50 to 80%. If you’re unsure of the average profit margin in your industry, a quick search on Google will provide you that information.

Once you have decided on your profit margin, deduct this percentage from the customer lifetime value after deducting the costs of sale.

For example, should your customer lifetime value be $250 after costs, and you’d like your profit margins to be 20%, then deduct 20% from $250. That would leave you with $200. What this means, is that your business can afford to spend up to $200 to acquire a new customer using fb adverts.

 

 

The fourth step to discover what your fb ads budget should be is to identify what a good cost per click and a good cost per lead is for your business. Again, these numbers vary a lot from one business to another, because it depends on what your business can afford to spend to acquire a new customer.

In order to identify a good cost per click and a good cost per lead for your business you have to know the conversion rate of the landing page you plan to send traffic to capture leads and the conversion rate of your sales process.

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For example, the conversion rate of your landing page (for cold traffic) could be 20%, meaning out of 100 people who visit your landing page submit their contact details and the conversion rate of your sale process such as your webinar or sales call can be 10%, meaning 10 out of 100 people who are exposed to your sales message actually buy.

Once you know your lead conversion rate and your sales conversion rate, it’s easy to calculate how much you can spend per Facebook ad click and how much you can spend per lead you acquire using business Facebook ads.

Let’s say you can spend $200 to acquire a new customer and your sales process converts 1 in 10 leads, it means you can spend up to $20 to acquire a lead through a Facebook ad.

And let’s say your landing page converts at 20% for cold traffic, it means you can spend up to $4 per unique click (unique visitor to your landing page) using fb adverts.

 

 

So to recap, to decide how much you’re willing to invest in business Facebook ads, make sure you know the following numbers:

  • Your cost per sale
  • Your customer lifetime value
  • Your landing page conversion rate
  • Your sales conversion rate
  • The amount you can spend per lead
  • The amount you can spend per click

Once you know those numbers, it is up to you to decide how much you can spend to acquire leads and generate sales from fb ads.

Should you wish to use fb adverts to acquire 10 new customers a month, and you can spend up to $200 to acquire a new customer, you can therefore spend $2,000 in total on a lead generation Facebook campaign, making sure you don’t spend more than $20 per lead, and more than $4 per unique click when using business Facebook ads.

Should spending a certain amount on Facebook ads not lead to a return or not lead to at least breaking even, you can either choose to not use Facebook ads as a traffic and lead source or optimize and fine tune your Facebook campaign to lower your cost per lead and cost per click as well as optimize your sales process to increase your sales conversions.

If you’d like to take your Facebook marketing to the next level, and increase the results you’re getting from your current Facebook marketing efforts by 10, click here to download my FREE Facebook marketing report. Simply enter your name and email and I’ll instantly send you the report.

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