How much advertising budget is the right amount

The most common question in advertising planning has the least useful standard answer. "Five to ten per cent of revenue" covers everything from a supermarket to a software company and helps neither.

Calculate backwards, in four steps

Step 1: how many new customers do you need? Take the growth target in revenue, divide by average revenue per customer, and add the customers you will lose to churn.

Example: £400,000 growth target, £8,000 average order, 50 new customers. Plus 15 replacing departures, so 65.

Step 2: what can a customer cost? Take the gross margin per customer and decide what share you will spend on acquisition. For a one-off purchase, a third of the margin is aggressive but common. For a business with repeat purchase, calculate on lifetime margin.

£8,000 order at 30 per cent margin is £2,400. A third is £800 permitted acquisition cost.

Step 3: multiply. 65 customers at £800 is £52,000 a year, or £4,300 a month.

Step 4: sanity-check against your conversion rate. If your enquiry-to-customer rate is 25 per cent, you need 260 enquiries. At an £80 cost per enquiry, that is £20,800, comfortably inside the budget. If it is £300 per enquiry, the plan does not work and something has to change.

The split most firms get wrong

Retaining a customer costs a fraction of winning one, and almost nobody budgets for it deliberately.

The floor nobody mentions

Below a certain level advertising does not scale down, it stops working. A search campaign with £300 a month in a competitive field buys too few clicks to learn from.

If the calculation yields less than roughly £1,000 a month, concentrate everything on one channel rather than spreading it. Three channels at £300 each produce three useless data sets.

Adjust twice a year

Recalculate in month six with real figures: actual cost per enquiry, actual conversion rate, actual average order. The first plan is always wrong; the second is usually close.