When To Scale Your Ad Spend

You’ve built your initial ad campaign…

Revenue is flowing in…

But, you’ve hit a ceiling. The leads aren’t growing, the budget is stuck.

How do you scale from here without destroying your bottom line?

So begins the delicate dance to balance performance & expenses.

Read on for our $100M framework for scaling your ad budget without tanking performance.

The Baseline

Before you can even consider scaling up your ad budget, you need to establish a solid baseline of data to measure yourself by.

Consider this the ‘rubric’ for what all future performances/expenses will be weighed against.

You’ll need to have a baseline metric for:

• Customer Acquisition Cost
• Customer Lifetime Value
• Average Order Value
• Profit Margin

Once you have these metrics you can run them through these equations:

(Average Order Value x Profit Margin) – Customer Acquisition Cost = First Month Ad Spend Return

(Customer Lifetime Value x Profit Margin) – Customer Acquisition Cost = Ad Spend Return

Use these equations to validate your initial campaigns.

Note: It’s very normal to have a First Month Ad Spend Return in the negatives. ie, -$1000. This just means that you aren’t covering your ad costs with new customers on month one. You will need to see repeat repurchases & account for future potential revenue to measure real ROI.

‘Ad Spend Return’ factors in full Customer Lifetime Value, and is a more accurate depiction of the total ROI of your ad spend.

Seeing The Patterns

If you see a negative First Month Ad Spend Return, you can’t just crank the ad spend up without limits.

You need to account for how long it may take for profit to start pouring in from the campaign.

Otherwise, you might overspend and run out of steam.

For example, let’s say your ads generate customers who spend $100/month with you.

If it costs you $200 to generate a new customer, then your First Month Ad Spend Return is -$100.

The Second Month Ad Spend Return is $0. The Third Month Ad Spend Return is $100.

When you factor in profit margins, this may take even longer.

So when you start to measure your ad campaigns it’s not about measuring “how much did we make this month?“. It’s an ongoing measurement of ad-attributed re-occuring or recurring revenue.

So the pattern in this example is that we can ‘buy’ customers for $200, and we get ‘paid back’ after 3 months.

So when we evaluate an ad spend ramp-up, we’d want to do it in quarterly intervals, that way we can line the growth up with new plateaus of customer revenue.

Cranking Up The Volume

Let’s say you have the baseline, and you’ve identified the patterns.

It’s time to crank up your ad spend. The question is, how?

Let’s get clear about what an ad spend increase could mean for your business:

1. Re-balancing existing budgets
2. Increasing budget for existing campaigns
3. Launching new creatives in existing campaigns
4. Launching new campaigns to the same audience
5. Launching new campaigns to a new audience
6. Launching entirely new ad platforms
7. Launching new ad formats

All of these pose potential risks to your overall campaign, but they’re also the only way to grow beyond your current ceiling.

Rebalancing budgets could potentially backfire on current performance KPIs.

Increasing budgets on existing campaigns often shows diminishing returns over time.

Launching new campaigns has no guarantee of performing as well as existing campaigns. You’re essentially starting over with new audiences/creatives to establish your baseline (again).

The best way to scale up is slow, then fast.

Take a portion of your budget (10%-20%) as experimentation spend. It’s the budget you use to learn and try new things.

Sometimes this portion of your budget will NOT perform, that’s what makes it an experiment.

However, when an experimental campaign does perform, you can move it into your primary budget.

This means, that if you find something that’s working you immediately add it to your primary budget. Then increase your experiment spending again to maintain a 10-20% experimentation budget.

This protects you from ever having your ‘growth/scaling’ budget from tanking your ads program.

Grow slowly when it’s not working, grow quickly when it is working.

Is your business growing with advertising?

Most companies get stuck spending low levels of ad spend and wonder why they can’t build a big business. Massive companies spend millions on advertising every month. They don’t advertise because they are big, they’re big because they advertise.