How to forecast the results of your digital advertising

Overview

It’s one of the most common questions when it comes to digital advertising... “what results am I expected to get?”.

To tell you the truth, there is no hard and fast answer to this question as there are so many factors that determine the potential effectiveness of your campaigns. Some of these include:

• Your current campaign performance and channel mix
• Product or service, brand reputation and ad messaging
• Conversion rate of your website
• Customer repeat rate and customer lifetime value

There are some key metrics that you can reference to help you build an idea of how you should scale your advertising spend, what channels to dial up or down, and what you’d expect to achieve from doing so.

We’ve created a little forecasting tool that will  give a sense of what you’d achieve if you invested into digital advertising, or show you how your results could change if you a looking to increase or decrease your existing campaign activity.

There are a bunch of inputs and levers in here that can help refine the forecast, some of these are of course optional.

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How to know what to spend on each channel?

We like to think of aligning your budget to not only the objective of your campaign, but using the standard ‘funnel’ approach. Please note that depending on your business, budget and what your marketing objective is, the recommendations below should only be used as a rough guide.

Awareness - Top of funnel

This is all about trying to reach people that may not have ever heard of you and you are looking to connect and make them aware of your product or service. Typically ‘demand generation’ channels such as Facebook and Tik Tok work well here, but with a bit of effort Google Display and YouTube are also very good options.

Goal - Reach new people that have never heard of you

Recommended budget - Around 50% of your budget

Recommended channels - Google Display, YouTube, Facebook, Instagram, Tik Tok, LinkedIn

Consideration - Middle of funnel

This is where people know about your brand, product or service and have engaged with your website, social channels or other platforms. It’s worth pointing out that these people are not necessarily in the market to ‘buy’ yet and most likely considering options, reviewing products or services similar to yours and assessing their need.

Note that trying to get them across the line and make a purchase at this step shouldn’t be your primary focus, instead it’s to keep them engaged with your brand and helping them understand your value against similar solutions without necessarily having a ‘direct sell’ communicated to them.

• Goal - Re-engage with people that have heard of you, interacted with your website or brand
• Recommended budget - Around 30% of your budget
• Recommended channels - Google Search, Facebook, Instagram, LinkedIn

Conversion - Lower funnel

This is where people have an intent to buy a product or service and are actively seeking it out, or they are currently trialing or have tried your product. This is where more personal communication and a further sell could entice them across the line.

• Goal - Get potential customers across the line
• Recommended budget - Around 20% of your budget
• Recommended channels - Google Search, Facebook, Instagram

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How to calculate customer lifetime value and profit from your advertising spend?

There are a couple of metrics to look at depending on the type of business you operate, albeit they are fundamentally the same thing for the most part.

eCommerce

• Average order value
• of purchases per customer over 12-24 months (or whatever time period you want)
  
• Average profit margin (this will differ product to product, category etc)

‍Formula = ((Average order value * average # of purchases over [time period]) * profit margin %)- Cost of acquisition

To give an example say your average order value is $100 but you know that on average customers make about 1 purchase every month across 12 months, and your average profit on a purchase is 30%.

Your cost of acquisition, is all of your marketing activity (and other resource) divided by the number of new customers over the month they were acquired. For this scenario let's say your total marketing budget for the month was $1500 and you acquired 30 customers, leaving your cost of acquisition $50.

This would be the final formula = ($100 * 12) * .30) - $50

That means for every $50 you spend on acquiring a new customer you'll make $310 in profit. Naturally you'll have a range of customers that will spend differently, and there are other costs involved, but this should help you with determining what your ad spend budget might be.

What you also would have noticed is that based on the above scenario you would have made a 'loss' on the first purchase. It's often good to reflect on what the typical customer value would be over a given time period, the level of competition you have, operating costs, and more to assess what your minimum threshold would be and what you are willing to give for that initial conversion.

Lead Gen / Services / SaaS

• Avg. purchase price or plan
• # of repeat purchases / repeat rate (frequency of purchase - is it monthly, bi monthly, annually?)
  

Formula = ((Average purchase price * repeat rate) * profit margin) - Cost of acquisition

You can get a lot more detailed with this one, but we are just going to keep it basic.

This is very similar to the above, but you may have a different journey that isn't just a 'direct purchase'. They may become a lead or trial the product first, before committing to paying.

A lot of SaaS companies also look at the 'payback' required to breakeven on acquiring a customer as this is an important metric to follow for cash flow purposes. Another thing to factor in is the rate of customers who cancel their subscriptions or stop making purchases in any given month, as this will significantly influence your MRR/ARR metrics. This is commonly known as 'churn'.

Naturally, you'd also want to focus your time on ensuring customers are continuing to use your platform or service, and extending out the longevity of their relationship with you.

The tool will allow you to put these metrics and spit out expected profits from your campaigns. Again, the best way to use this forecast is to make some assumptions, run a few campaigns to get some performance data, then re-input those numbers back into the tool.

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