How to Confidently Set an Initial Annual Ad Budget

Nathan Andrew

Are you making donations to Google & Meta, or strategically propelling your business forward?

If you feel like your ad spend does more to increase Google’s and Meta’s market cap than it does to grow your business, you’re not alone. These are some common questions I get about ad buying when we begin working with a new client 👇

“How much money are we spending on Facebook? How about Instagram? Wait, aren’t they like the same thing or something? And isn’t Facebook kind of on its way out? Let’s pull back our investment there.”

“I noticed we’re not advertising on our competitor names in our Google campaign. Why not? Let’s make that happen. And I feel like advertising on our own name is a waste of money, so let’s turn that off. Oh, and your SEO report really made it sound like Google Things To Do ads were cannibalizing all our organic traffic, should we just pull back there too?”

“I’ve heard that more people use YouTube than any other social platform. Is that true? We’ve been publishing videos on YouTube for years without any traction. If our audience is there, how do we reach them?”

“TikTok?? Ah, I just don’t know about TikTok. I feel like tweens, teens, and 20-somethings live here, and that’s not my target audience. However, they may influence their parent’s decisions and I hear it’s a cheap way to reach people. Let’s try it.”

“How about LinkedIn? Don’t rich people use LinkedIn? Let’s prioritize that.”

“Ah shoot, and then there’s Pinterest—I heard a lot of middle-aged women plan their vacations on Pinterest. Can that be true? I thought Pinterest was for home projects. I wouldn’t know; I don’t even have the app on my phone. But we might as well give it a try.”

“I’m starting to feel overwhelmed by this train of thought, but since we’re on it, let’s at least get Twitter, Reddit, and Snapchat on the table.”

Individually, most of these questions are pretty straightforward to answer. The trickier line of questioning is the one that surfaces when you zoom out and look at everything at once. What is the right amount to spend on digital ads, and where should I spend it?

I’ve spent a lot of time feeling overwhelmed with the weight of this question and have found that any “simple” answer sets off a hundred other questions. So rather than staying high level and ignoring the nuance woven into the question, let’s break this into two parts and peel back the layers that matter the most.

Part 1: How much should I be spending?

I’ve audited ad accounts flushing hundreds or thousands of dollars down the toilet every week because they feel like their scaled-up budgets hold their business together at the seams. Or, more commonly, I talk with proud owners of ad accounts boasting 30x returns on tiny daily budgets. Neither of these is where you want to be. The first is inefficient and wasteful, and the second just means you’re leaving a lot of money on the table (assuming you have capacity to fill).

So, how do we find a path forward? What’s the happy medium? It’s important to not rely on making this decision once and moving on with your life. Instead, think about your ad spend the same way you’d think about any other business investment—something that you need to evaluate over time based on your capacity, your goals, ad performance, your margin, your risk tolerance, and more.

A mental framework for ad budgets

Let’s build a mental framework and head towards an initial answer here. Then we’ll discuss how to answer this question over time as you evaluate the impact of advertising on your business.

Our goal: Set an ad spend target for the year.

To do this confidently, we first need to gather some basic data about you and your business. Here’s the (non-comprehensive) list that can serve as a starting point for most tour, activity, or attraction businesses👇

DefinedWhy it matters
Avg. daily capacityWhat would maxing out your capacity on an average day look like?Gives us a sense of your max daily revenue potential.
Channel mixHow do your revenue/bookings break down by channels such as website, phone calls, walk-ins, partnerships, OTAs, etc.Our ad spend will work to drive direct bookings on your website. Knowing what percentage of revenue that channel has taken historically, is helpful.
Channel costHow much of each dollar generated do the channels take?Knowing what percent of revenue your non-direct partnerships are taking can help set ROI targets for direct marketing efforts.
Avg. order value (plus on-site added value)How much total revenue comes in from your average order and how much is added to that on-site (food & beverage, souvenirs, add-ons, extras, etc)?Helps us set an appropriate target cost per acquisition (CPA).

Repeat Business → LTV
The goal here is to generate an estimated lifetime value (LTV) for your typical customer. The formula here is simple: Value of a customer x annual purchase frequency x customer lifespan (10 years is a good starting point, but can be longer for tour and attraction brands).It’s important to create an estimated lifetime value of your customers to factor in the value of a customer beyond their first purchase with you.
Seasonality & avg. yieldOn average, how sold out are you? How does this change seasonally? How about on holidays? Weekends?We want to make sure to only spend money when you have capacity to fill.

Net margin scenarios (without factoring in added advertising costs)
Within your current cost structure, how does your net margin change as you get closer to 100% yield?This answer impacts what scaling up your ad spend could look like.

Non-display traffic
Excluding display traffic (Meta, YouTube, Google Display, etc) how much traffic do you currently get to your site?Knowing your traffic volume will help set an initial remarketing target budget based on a frequency target.

Second, we need to gather some intel about your market and your customers’ buying cycle. Here’s that non-comprehensive list to get us started 👇

Defined Why it matters
CompetitionHow competitive is your market?Competition is a big scaling factor. The more competition there is, typically the more expensive the ad costs are.
Existing demandHow much demand is there currently for your offering, specifically?For example, if there isn’t a lot of demand, step one may be demand generation primarily with a low return expectation.
Revenue mix by locationRevenue breakdown for…
Locals: People who live in the area.
Drive-distance: People who live within 2 hours of you.
Travelers: People who live 2+ hours from you.
Knowing the location of your typical customer base will help shape our geo-targeting structure and can have big implications on our ability to scale ad spend.
Buying journeyDoes your typical customer buy same-day? A week in advance? Months in advance? How does it change based on where they live?Understanding your customer’s buying journey will help us determine your ad buying cycles throughout the year.

An Example

Now that you have a sense of what we’re after, it’s time for the rubber to meet the road and run this process. We’ll do that for a fairly common scenario we see: An attraction based in the outskirts of a semi-touristy metro area with a lot of capacity to fill.

Attraction: Urban Oasis Adventure Park (not a real business, but based on real businesses)

First, gather some basic data about the business.

Avg daily capacityUp to 2,500 guests
Chanel mix 10% – Local partnerships & concierge desks
20% – OTAs
30% – Direct walk-ins or phone bookings
50% – Direct through the website
Channel cost Local partnerships take 15% of the revenue they book (average)
OTAs take 25% of the revenue they book (average)
Walk-ins & phone – 5% (estimated staffing costs)
Direct web – 0% (the booking fee is passed on to the guest)
Avg. order value (AOV) + onsite purchases. AOV: $100 (2.5 person group)
Avg Visit Value (per person): +25%
Total avg AOV = $125
Lifetime value (LTV)$50 (customer value) x 1 (avg visit every year after first visit) x 10 (customer lifespan in years) = $500
Seasonality & avg. yieldPeak Season: Open 7 days a week (June-Aug): 60%
Sun-Fri: 50%
Saturdays: 90%
Holidays (3 weekends): 100%

Shoulder Season: open Fri-Sun (May, Sept-Oct): 40%
Fri-Sun: 30%
Holidays (3 weekends): 90%
Net margin scenarios (without factoring in added advertising costs)Average net margin: +10% (at 45% yield)
@ 40% yield = 0% (break-even mark)
@ 60% yield = +20%
@ 80% yield = +35%
Non-display traffic5,000 sessions per day

Second, we need to gather some intel about the market and the customers’ buying cycle.

CompetitionSemi-competitive. There are two direct competitors with similar attractions within 5 miles of them. And probably 100+ indirect competitors offering things to do and competing for their customers’ wallets.
Existing demandThe amount of people just looking for stuff to do far outweighs the direct searches for the activity. They’re not a hallmark activity in this destination, and they’re new compared to the competition.
Revenue mix by locationLocals: 20%
Drive-distance visitors: 40%
Travelers/Vacationers: 40%
Buying journeyWhile they’re open (May-Oct) 90% of purchases are made within 48 hours of their experience (even for out-of-towners).

Before they open, pre-bookers will lock in their tickets months in advance.

Quantify the TOTAL opportunity vs. what feels realistic

Now that we have the baseline information, let’s make it actionable.
To start, let’s define the opportunity we’re looking at. This is pretty simple 👇

This business is looking at a + $8.5M opportunity (or about doubling their revenue) if they sell every available ticket. However, the likelihood they sell out 100% of the days they’re open is basically 0%. Now, let’s consider the weather, seasonality within peak season, unexpected closures due to a park element failure, and some other unknowns and cut the opportunity by more than 75% down to +$2M, which would be roughly 20% growth. Based on the yield and margin scenarios listed, an extra $2M in revenue would boost average yield to just over 60%, which would bump margin from around 10% up to 20%. Without factoring in advertising costs, that’s an extra $1M in your pocket at the end of the year.

And it gets better because as you dial in your advertising strategy (and probably execute other direct booking strategies) to grow revenue, you’ll find that other partnerships and OTAs don’t grow at the same rate, and may even decrease as you see a shift towards direct bookings. (We’ll discuss why this is a good thing later.) Because of this, we’re going to assume that all of the $2M in growth for this business will come from direct channels (website, walk-ins, and phone calls). And 75% of that revenue growth will come from customers who have never been to the park.

TL;DR: 👉Not only does this growth mean an extra $1M in profit (before ad costs), as well as 30,000 new customers talking about and sharing their experience with the world, but it also means an extra $15M in customer lifetime value (the LTV of 30,000 customers).

Setting Your Annual Ad Budget

What does all of this mean for your initial ad budget? If you’re in this position, you can (and should) be aggressive with ad spend. Even if you only break even on your ad investment in year one, it will pay off 10x over the lifetime of your new customers! And in this scenario, with even just a 2x return, you’re ending the year with the same profit as last year but with an extra 30,000 new customers in your ecosystem. But, let’s be real, most business owners want better than a 1 to 2x return in year one. So let’s chart out our targets based on what we know about this business.

NOTE: We’re calculating the LTV ROAS by assuming ads targeting previous customers will be twice as effective as with new customers. In other words, you’ll still need to reach your previous customers to compel return visits—it’s simply more cost-effective to drive return visits vs new.

Time of yearGrowth targetAdded LTVAd spend targetBlended ROASLTV ROAS
Pre-season (Jan – April)+$150k$1.1M+$50k3x11x
Shoulder Season+650k+$4.9M+200k3.3x13x
Peak Season+1.2M+$9M+$300k4x15x

You may look at this and wonder why I’m excited about getting $3.60 back for each dollar spent. Maybe you’re thinking, “I get $4 back for each dollar I’ve invested in Tripadvisor; why is this a good target?”

There are two key differences worth pointing out. First, typically the only way to scale up your OTA partnerships (with Viator, for example) is to pay a higher commission which can quickly become unsustainable. Second, the lifetime value of a direct booking is much more valuable than an OTA booking.

Can You Scale Up With Viator?

We worked with a company recently that went all-in with Viator as an experiment to see if the increased investment would lead to improved returns. They increased Viator’s cut from 26% of revenue up to 41% of revenue. While they did see a marginal increase in overall revenue, they actually ended up losing money. When Viator increases their commission, they do it for all revenue, not just incremental revenue. This makes it challenging to justify unless the growth is astronomical. If Viator had doubled our client’s revenue, the ROI on the growth would only have been $1.80 back for each dollar spent (about half of our direct target). Even at a 500% increase in revenue booked, the ROI is still just $2.34 for each dollar spent! Getting excited about the 3.6x makes a lot more sense now, doesn’t it?

Generally, without increasing Viator’s (and other OTAs’) revenue cut, your revenue will simply track with demand in the OTA’s platform. So you’re essentially basing your growth on their growth, which is risky. I would much rather be in control and pulling levers to influence direct revenue.

OTA LTV vs. Direct LTV

Another consideration as we think about the value of a direct booking vs. an OTA booking is the lifetime value of each customer. Typically, when a customer books through an OTA like Viator or Get Your Guide, the LTV potential is greater for the OTA than it is for you. Viator is popping corks—another user downloaded their app, signed up for email updates, and made a booking! But you didn’t receive much—no email, no phone number. Essentially you don’t have a good way of keeping the customer engaged with your brand over time (unless you can capture that info on-site, but even then, the customer is in the OTA’s ecosystem and will likely return there if they want to book again). Because of this, the LTV of direct bookings is much more valuable, making it easier to justify a higher initial cost to acquire a direct customer vs. a customer booking through an OTA.

For our sample business, I would much rather scale direct bookings at our target 3.6x ROI (or even as low as a 2x ROI) vs. rely on OTAs to drive my growth at a 4x ROI and hand over even more money for murky returns.

A Few Quick Management Tips

As I mentioned above, you can’t set and forget your ad budget and campaign—that would be like throwing money at something with your eyes closed. Instead, the real money is made through careful day-to-day management of your budgets, targeting, and creative.

Manage Your Spend—Daily

As you go a layer deeper and begin setting up your daily budgets, you want to ensure that you track revenue based on when people are making their purchase decisions. For example, during pre-season, you probably want to continually build up your ad spend to track with demand, interest, and conversion rate of your efforts. Here’s a quick screenshot that illustrates how we’re doing this for one of our clients 👇

As revenue seasonally ebbed and flowed, our ad spend tracked with it.

Watch Your CPM

CPM stands for “Cost Per Thousand Impressions.” It’s a metric that can swing wildly between markets, based on competition, and throughout the season. Since all ads go through an auction, the more competitive your market, typically the higher your CPM—so having an understanding how competitive your market is will help you predict your ad costs before you even get started. This metric can be the determining factor in how much you can scale up or down a certain ad set during different times of the year. For example, for this client (and many clients) CPM climbs steadily upward as we head toward Black Friday 👇

Be Intentional About Your Remarketing Frequency

The company in our example had about 5,000 daily sessions to its website. Assuming we can reach 50% of those visitors, that’s close to 20k site visitors we should be remarketing to each week (not to mention social engagers, audience lists, etc). We should set our remarketing budget initially to try to reach them roughly once a day (a 1x daily frequency). If you’re looking at a $10 CPM, setting your daily budget between $25 and $30 should do the trick for this audience size.

Don’t Just Watch Your ROAS

While your return on ad spend (ROAS) is a useful in-platform metric, it only shows one piece of the puzzle. As you scale up and down your ad spend and test different ad channels, you’ll want to keep an eye on your marketing efficiency ratio (MER). This is a simple number found by taking your total revenue and dividing it by your total advertising costs. Tracking this closely—especially as you’re testing new markets or channels, can give you a good pulse on the efficiency and effectiveness of your efforts.

Get Into a Management Rhythm

Here are a few items in our internal management checklist for ad accounts we manage. Most of these items will fall into a daily, weekly, or monthly cadence.

This list does not include social ad creative management, initial account build, or our end-of-month reporting and strategy development items.

Social Management:

  • Audiences – Add new account videos to relevant video view remarketing audiences
  • Audiences – Update customer list audiences with new customers
  • Bid Strategy – Make sure the bid strategy is giving Facebook a strong enough signal
  • Budget – Analyze budget pacing for the remainder of the month.
  • Budget – Increase budgets on ad sets or campaigns where performance is strong and frequency is low.
  • Budget – Make sure spend is well distributed across the products that we’re selling.
  • Budget – Optimize spend distribution in lookback windows to maximize reach and ROAS.
  • Budget – Set a minimum spend for ad sets performing well but not spending enough because campaign budget optimization isn’t giving it a chance.
  • General – Make sure what we’re saying in our ads is still supported on the website/landing pages.
  • Reporting – Upload offline events.
  • Targeting – Add any new audiences to the funnel based on existing or new brand engagement.
  • Targeting – Make sure ads are targeted appropriately (family ads showing to families, etc).
  • Etc…

Search Management:

  • Settings – Review Search Partners’ performance and disable if not performing well.
  • Budget – Impressions share analysis.
  • Keywords – Deduplicate keywords.
  • Keywords – Add long tail keyword phrases from the search query report.
  • Keywords – Research and apply negative keywords.
  • Bids – Identify opportunities to reduce costs.
  • Bids – Evaluate mobile bid performance, and adjust modifier up or down accordingly.
  • Bids – Evaluate location bid modifiers if present, and adjust modifier up or down accordingly.
  • Ad Copy – Adjust ad copy on low position, low-quality score keywords.
  • Ad Copy – Test new ad copy/ad groups on low-position, low-quality score keywords.
  • Ad Copy – Write new ad copy variations where needed.
  • Ad Copy – Review ad copy tests that have collected adequate data, and pause non-performers (always ensure at least two ads per ad group are live, though).
  • Ad Copy – Build out new ad groups based on high converting search terms as needed. (in terms of not being met by existing ad copy).
  • Placements – Review placement report for non-performing, high-spending placements to be excluded.
  • Etc…

There’s a Lot We Didn’t Get To…

From building your creative prompts at the intersection of motivation and ability, to applying a healthy skepticism towards your platform-specific ROAS number, weighing whether you should run gift card campaigns, dialing in your search impression share, strategically taking advantage of Google’s Things To Do placements, seasonally crafting your creative with timely and targeted messaging—there’s a lot we didn’t get to in this article. But hopefully, this can serve as a good framework for setting that initial spend target for the year, and as a motivation to obsessively manage your ad spend throughout the year.

Up Next: Where Should You Spend Your Ad Dollars?

Coming later this summer! 🙂
Stay tuned…

Is your advertising providing a solid return on investment?

We’ve managed advertising for tour, activity, and attraction companies for years, and we’d love to discuss how we can help grow your revenue. Whenever you’re ready, let’s chat.

Get Proven Tourism Marketing Tips In Your Inbox

About The Author

Nathan Andrew

Nate is passionate about helping companies reach their goals through integrated digital marketing campaigns and local SEO. He loves helping tour and activity company leaders stay focused on the numbers that matter, and fostering sustainable long term growth and profitability.

Email Nathan

About The Author

Nathan Andrew

Nate is passionate about helping companies reach their goals through integrated digital marketing campaigns and local SEO. He loves helping tour and activity company leaders stay focused on the numbers that matter, and fostering sustainable long term growth and profitability.