How to plan a paid advertising budget
Work out an advertising budget from your numbers: what a customer is worth, what you can afford to pay for one and how much testing you need.
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Key takeaways
- Start from customer value and margin, not from a round number.
- Budget for a learning phase before expecting steady results.
- Divide budget by goal and channel, and review it monthly.
"How much should we spend on ads?" is easier to answer once you know a few numbers about your business. Here is a practical way to build a budget you can justify.
1. Know what a customer is worth
Estimate the average value of a customer: the first purchase, or better, the gross profit over the time they typically stay with you. A service with repeat clients is worth more than a one-off sale.
2. Decide what you can pay to acquire one
From that value, decide the maximum you can spend to win a customer and still make a profit. This is your target cost per acquisition.
If your sales process converts a share of leads into customers, you can work back to a target cost per lead. For example, if one in four leads becomes a client, you can afford to pay up to a quarter of your maximum cost per customer for each lead.
3. Estimate the volume needed to learn
Ad platforms and you both need data. Look up typical click costs for your keywords or audience, and estimate:
- Clicks needed to generate a meaningful number of conversions
- The resulting monthly spend
If that number exceeds your budget, narrow the focus: fewer services, smaller areas or one channel.
4. Plan a learning phase
The first weeks are for learning which keywords, audiences and messages work. Expect higher costs at first. Set a defined test budget and duration, and agree in advance what result would justify continuing.
5. Split by goal and channel
A typical split:
- Capturing demand from people already searching, such as search ads
- Creating demand with social and video ads
- Retargeting people who visited but didn't convert
- Testing new channels or offers
New businesses often prioritise capturing existing demand first, because those visitors are closer to buying.
6. Account for seasonality
Increase budget when demand peaks and scale back in quiet periods. Past sales data and search trends help predict both.
7. Review monthly
Compare cost per lead and per customer with your targets, then move budget towards what works.
Our paid advertising service starts with this calculation, so spend is tied to business results from the first month.
Frequently asked questions
Is there a minimum ad budget?
Platforms allow small budgets, but a budget too small to generate enough results makes it hard to learn what works. Estimate how many clicks and conversions you need to judge a campaign.
Should agency fees be included in the ad budget?
Plan them separately, so you know exactly how much goes to the platforms and how much to management.
