If you’re running an eCommerce business, marketing is vital to your success. Great marketing gets people to your website, buying your product and becoming loyal customers.
However, too many eCommerce brands make the fatal mistake of not creating a marketing budget. They’ll spend what “feels right” on their marketing instead of what makes sense. This approach is sort of like going on a road trip and guessing how much money you’ll need for gas. There’s a chance you’ll end up stranded on the highway, or a chance you’ll spend much more than you need to.
So, how do you create a great eCommerce marketing budget? It’s far simpler than you’d think! In this blog, we’ll break down how we help our customers create eCommerce marketing budgets that put every single dollar to good use.
Why have a marketing plan budget?
First, let’s dig a bit deeper into why you should have an eCommerce marketing budget. Of course, a marketing budget plan will help you put your money where it matters. When you know how much you can spend, you know how much you can put into different areas of your marketing. However, this isn’t the only benefit of having a marketing budget. It can also:
Help you set benchmarks and goals
Setting a budget is an important step in establishing goals, benchmarks, and expectations. It'll help you make more informed decisions regarding the marketing channels your company should use to reach its desired level of growth. You can use this information to set realistic goals for various marketing channels, while understanding what revenue is needed in order make those efforts worthwhile.
Help you plan long-term
Planning your marketing budget ahead of time is important. It allows you to create a more consistent and effective strategy for the long term, without having funds cut short due to changing priorities or lack thereof. A good strategy will have a long-term perspective and allow for flexibility with short term changes due to fund fluctuations, while still being able create consistent strategies over several years rather than just one or two when things go wrong (which they often do).
Let you invest in your business’s growth
Marketing is an investment, not just another cost for your business. If you invest in marketing correctly it can help grow and develop the most out of your company's growth. By creating a marketing budget, you can maximize the potential for success by making sure you’re getting your brand’s name out there in the most cost-effective and efficient way possible.
How to plan a marketing budget
We get it, numbers feel scary. If numbers aren’t your thing, then getting started planning your marketing budget might feel overwhelming. However, the main process of creating a marketing budget can be broken down into just six steps.
1. Know your business goals
First, you really need to understand exactly what you’re wanting to achieve. Of course, this usually is to increase revenue for your eCommerce business, but it’s important to determine how much you want to increase revenue by.
Typically, a marketing budget for any eCommerce business could be anywhere between 5-12% of revenue. If you’re a younger company (or just a very ambitious one!), you’ll likely want to spend closer to 12% to fuel aggressive growth. However, if you’re a well-established company who’s got revenue coming in and wants to grow more incrementally, you might have your spend closer to 5%.
You need to know what you want to achieve, so you can set a budget that allows you to achieve those goals. You can set goals that focus on:
- Growing sales
- Increasing leads
- Earning more subscribers
- Increasing brand awareness
- And more
2. Know your unit economics
Once you have an idea of how much you’re wanting to spend on your marketing. It’s time to dig into some all-important numbers that are going to help you decide where your money is best spent.
To understand why these numbers matter you first need to think about your core goal as an eCommerce business – to get people buying from your website and becoming repeat customers. If people buy lots and buy frequently, you’re more likely to make money. Simple.
But how much does it cost to for them to buy right now? Without understanding the numbers that go behind this core function of your eCommerce business (i.e. the cost of getting products from manufacturing to customers), it’s impossible to create an effective marketing budget that’s going to impact your ability to turn a profit.
What most marketers miss is that when you don’t understand how much people are spending and what it costs to fill that, then you have no idea how much you’re willing to give away to acquire new customers.
So, how can you figure that out? The good news is that we’re going to help make this part easy. We’ve broken each number down below:
Important number 1: AOV
The most important stat for understand your unit economics is your average order value (AOV). AOV tracks the average dollar amount spent each time a customer places an order on a website or mobile app.
Knowing the average dollar spend of each order placed across your business channels can help you plan pricing and marketing strategies to then increase that value — which can significantly impact your bottom line.
Important number 2: Average Quantity
AOV represents the amount of money someone spends on average at your website. However, this might not always be for one product.
You’ll also want to understand how many units does that average order represent, which is known as your Average Quantity (Avg. QTY). Again, you can find this number on Google Analytics or Shopify.
Knowing your Avg. QTY will again help you understand exactly how your customers are behaving when they’re buying from you.
Important number(s) 3: Cost of Goods Sold
So, you know how much people are, on average, spending and buying from you. Now you need to know how much it costs to for you manufacture your product and have customers receive it.
To do this, we like to calculate a blended cost of goods sold (COGS) percentage, which is averaged out across all products. For example, you might estimate that overall, 20% of your average order value goes towards manufacturing and shipping products to customers.
Within your COGS, there are also some other all-important costs that you’ll want to understand:
- Credit card fees: Most payment providers, such as Shopify payments, Stripe, Paypal and ApplePay take a percentage or dollar amount from every order. Across all your payment options, you’ll want to find out what these costs are on average, what percentage of your average order value they are.
- Merchant fees: Depending on what eCommerce platform you’re using, your merchant will take a percentage or fixed fee, which again you’ll want to understand as a percentage of your average order value.
- Shipping fees: Understand the cost that, on average, it costs to ship your product.
- Cost of fulfilment: if you’re working with a third party to fulfil your order (3PL), they’ll likely charge you a pick fee. You need to know the agreement you have and understand the per unit cost.
Very important number 4: Fuel Profit
Here’s where we start to get some numbers that are really going to help inform your marketing budget. You’ll next want to calculate your Fuel Profit, using the below equation:
AOV – Cost to Fulfil Order = Fuel Profit
If you’re using the Socialike Marketing Budget Calculator, this will be calculated automatically from the numbers you entered in 1, 2 and 3 above.
This number matters! Once you know it, you now have a number that you can decide (based on your goals), how much you’re willing to give away to acquire new customers.
However, this isn’t our final destination. To make that number useful there’s a few more steps we’ll need to go through.
3. Decide Your Target Margin
Once you understand your unit economics, you’ll want to decide on a target margin. So, in other words, once you’ve fulfilled an order, shipped it and accounted for the cost of acquiring it, how much do you need to have left over?
This is a highly dependent number and is largely driven by your growth goals (I.e we can’t tell you what is should be!). However, it’s usually driven by customer lifetime value (LTV). LTV is a measure of the average customer's revenue generated over their entire relationship with a company.
Put simply, if you know that once you’ve acquired a customer they’ll keep coming back – whether that’s due to the nature of your product, how you’ve set up payment (e.g. subscription), you’ll likely want to invest that money into keeping churn down instead of acquiring new customers.
If you’re unsure about your LTV, there are a few ways to calculate it. For example, a rough way is to simply export the last 12 months of orders, sum up the total number of revenue and divide by the total number of customers.
But, if you’re more worried about simply getting cash into your business, an easy answer is how much money do you need to order more product? Once you know this number it can help you work backwards and develop a target margin goal.
4. Understand your CPA and ROAS
Now that you know your unit economics and your target margin, you’re in a fantastic place to start thinking about how much you have left over to spend on marketing. To get an understand of this number, there’s two important metrics you can use:
Cost per acquisition: Simply, how much money do you spend to acquire a single paying customer for your business? You know how much you want as a margin (your target margin) and how much you can spend on advertising (your fuel cost).
CPA = Target margin – Fuel Cost
By simply, subtracting your target margin from your fuel profit, you’ll know how much you have to acquire a new customer.
ROAS: How much money do you need to be getting back from your ads to be making your business work? For example, if I had a ROAS of 2.5, every $1 I spent on advertising would need to get me $2.5 back. You can figure out your ROAS simply by dividing your AOV by your CPA.
ROAS = AOV/CPA
Of course, if this number is too high, your business is harder to sustain (ROAS above 3.5 are usually considered too high), you’ll want to assess if you can change unit economics (e.g. shipping costs, credit card fees) to bring the number down.
Once you know these costs – great! You can enter them into the Socialike Marketing Budget Calculator and begin to play around with how different ad spends will impact your bottom line.
5. Understand Sales Cycle
Now that you understand your ad spend, you’ll want to distribute it appropriately based on the type of ad campaign that you need to use to hit your goal.
To do this well, you’ll want to reflect on the initial growth goal that you’ve developed. Are you a brand that is well-known? Or are you a new brand just getting started? Are you trying to get more sales or simply more subscribers?
You’ll also want to understand the journey that your customers go on when they become a customer, better known as your sales funnel.
Broadly, your sales funnel can be broken down into 4 stages:
Awareness: At this stage, your audience becomes aware that they have a problem and starts looking for solutions.
Consideration: At the consideration stage, your audience starts to look at the options available to them.
Decision: When a lead reaches the decision stage, they start to narrow their focus on companies that provide the best solution or product for their needs.
Action: Once a lead reaches the action stage, they choose your business and become a customer.
One key mistake marketers often make is simply running one type of ad. They might run ads that build an audience, or ads that generate leads. However, true success relies on you doing a combination of audience building, lead generation and retargeting. The exact spilt that you choose for your tactics will depend on your specific goals and what you’ve observed in your marketing data.
For example, let’s say you notice that your business’s funnel has a ton of people at the consideration stage, but very few make it to the decision stage. While some drop-off is natural, you notice that the decline is more significant than what you’d expect. Creating some education content and using strategies and distributing it using video marketing, pay-per-click (PPC) ads, and social media ads may help you push those leads down the funnel.
6. Know what tactics you want to use
Finally, you’ve understood your unit economics, your sales funnel and your overall marketing goals. The final part of putting that altogether is understanding what channels you’re going to use to market through.
Since you already know your CPA, or what you want to spend to acquire a new customer, you can use the numbers you calculated in your profit analysis to distribute this spend as needed. You don’t want to spread your spend too thin, otherwise you won’t be able to make enough of an impact. To help you get an idea, here’s a range for how much you should expect to pay for online marketing strategies from a digital marketing company:
- SEO: $500 – $20,000+ per month
- PPC: 5-20% of monthly ad spend
- Content marketing: $2000 – $20,000 per month
- Social media marketing: $250 – $10,000 per month
- Email marketing: $300 – $2500 per month
Mistakes to avoid
Ok, so once you’ve developed your marketing budget, what are some common errors we often see made in eCommerce businesses:
Cutting your budget
Of course, the biggest mistake you can really make is not having a marketing budget. Without a marketing budget you have no idea where your spend is going, and if it’s truly effective. It’s simply like putting money in a black hole and hoping for the best.
Marketing budgets get cut first because they are often viewed as non-essential costs – but this is a mistake! When a company completely cuts its marketing budget, it also reduces the chance of getting new customers. Cutting a marketing budget may reduce the amount of returning customers as well. In other words, it has the potential to end a business entirely because the well eventually runs dry.
Not giving your strategy enough time
To know your strategy and chosen marketing spend is working to improve all important key metrics such as AOV and LTV, you need to give it enough time. Time is crucial to get the initial data, analyze what the data is telling you and then make the appropriate adjustments from there.
How much time you need will really depend on your customer buying cycle. If your average cycle is 6 months long, you’ll need to wait far longer than someone who’s buying cycle is a simply a number of days or hours.
Of course, if you can clearly see something isn’t working, then feel free to change it. However, hopping from strategy to strategy and budget to budget is the same as hopping between multiple gym programs – it's unlikely to get you any results.
Not spending enough
Remember, marketing is an investment. You’ve got to remember that the size of the marketing and the cost of your product ultimately will dictate what you can expect to see in terms of cost per lead. If you don’t spend enough money each month, your budget may be spread so thin that you’re not going to see results. Bumping up the budget might feel like a risk initially, but it could make all the difference to helping you see the results you want.
If you develop a marketing budget and then never look at your AOV or LTV ever again, what’s the point? Creating a budget isn’t something you do once and then don’t look at until next quarter. Instead, it should be a far more dynamic process. Monitoring your spend and data consistently will allow you to make tiny tweaks to your budget consistently that are going to make all the difference with hitting your eCommerce growth goals.
When it comes to marketing your eCommerce brand, you need a plan, and that includes a budget. A well-planned marketing budget can make all the difference between healthy sustainable growth, and growth that stalls over time.
However, eCommerce marketing budgets aren’t all sexy vanity metrics. They’re based on what it actually costs to make products and get them to your customer.
If you’re wanting help with your marketing budget, we certainly can help. Socialike has worked with eCommerce brands to help them grow their sales by as much as 400%. Get in touch today.