The Side Hustle 10: How Much to Spend on Paid MediaSep 18, 2023
Reading time 2 mins 40 seconds.
I'm little late on this one this week, as we relaunched a little business I'm a partner in, Shosai.
You've probably wondered how much you should be spending on ads for your online business. By ads, I refer to paid media, and by paid media I mean paid digital advertising, which for the majority of you will mean paid social and paid search - basically, Meta and Google.
I'll go about answering this in three parts:
1) What your business objectives are.
2) How much you need to spend to get traction.
3) How much other brands are spending.
What are your business objectives?
This is a question that guides a lot of decision making in business. For example, you might be three months in to your ecommerce side hustle, still working in your full time job, and just trying to gain some market share in your business before you can eventually increase your organic traffic, repeat purchases, and then focus on profitability down the track - in which case you might be happy to burn a little bit of cash while you spend 50% of your monthly revenue on ads.
Or, you might be two years in, looking for a stable 15-20% net profit, while aiming to keep on a slow and steady path, in which case you're probably going to spend around 15% of your revenue on paid media.
The point is, the more you spend as a percentage on marketing, the more you decrease your net profit margin, but if the extra revenue you gain through increasing your marketing spend is worth it, then that might be a decision you would make.
In other words, if you usually spend 20% on ads, then you decide to increase your spend to 25%, while keeping your other costs steady, then your net profit will worsen by 5%, however, if your sales increase as a result of the extra 5% spend, and as a result, the net profit dollars rise, then that might be a suitable outcome for you.
How much do you need to spend to get traction?
This is a two part answer. If you're a new business then it's likely you might have to give your paid media spend a little nudge to get things going - it's not uncommon for new brands to front load a bit of marketing spend in order to get some early traction in lieu of having no repeat customers yet, and the general nature of a slow burning organic strategy.
That's fine - to an extent. I always say, it's your strategy, if you want to be more aggressive at the start to buy market share, that's fine, as long as you go in with your eyes wide open, and you understand the impact on your bottom line.
If you're a couple of years in to your business, and you're finding that you need to spend over 20% of your monthly revenue on paid ads in order to break even, then it's likely that one of two things is happening:
1) You're product or brand isn't getting the traction required to grow without over spending on paid media. In other words, you're having to spend your way to growth, and force your product on people. You may need to rethink your product, or your brand's offering - why isn't your product or brand spreading organically, after all - good news travels.
2) You're trying to grow too quickly. In other words, you're forcing the growth a little too quickly, otherwise what I call, paid-led growth.
3) You're over spending on operating expenses. Basically the same as number 2, you're forcing the revenue, but this time because you've loaded up on your operating expenses, and if you drop below a certain paid media spend level, your sales drop, you can't afford to pay your bills. That's critically dangerous territory, if you're requiring sales to reach a certain point each month in order to survive, then you probably won't.
How much are other brands spending?
Now, this doesn't really matter, because you should be running your own race. Nonetheless we all like to benchmark our performance. So, the average paid media spend that I see is around the 15-18% of monthly revenue less tax.
The best brands are spending less than 10%, because they're usually doing other interesting things, like spreading their organic social media presence, or they have a great product that gets people talking.
If I come across a brand that's spending over 25% on paid media, then I would be able to usually make the assumption that they're not making any money. A healthy brand doesn't need to spend 25%, as organic traffic should be doing the heavy lifting (by organic I mean any free traffic).
Generally, if your gross profit margins are over 50%, then spending 15-18% of your revenue less tax on tax should leave you with a net profit of over 20% if your other costs are under control.
So, how much are you spending on paid media?
Until next week,
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