Why You Shouldn’t Set an Ad Budget, and What You Should Do Instead

 
Brian Nicholson

Agency: “Your return on ad spend is 12x.”
Client: “Great. How much have we spent?”
Agency: $2000
Client: “Then we’re at budget. Let’s stop for now.”
Agency: “Do you still have capacity?”
Client: “Yes.”
Agency: “Do you have a more cost-effective way to get bookings?”
Client: “No.”
Agency: “But you want to stop sending?”
Client: “Yes. I budgeted $2000.”

Why Tourism Companies Set Digital Advertising Budgets

Clients like the one in this story are often happy to keep paying 25% to Tripadvisor and other affiliates (the rough equivalent of a 4x ROAS). So why do they cap their digital ad spend even when it’s more cost-effective? We’ve seen a few reasons:

  1. Habit. Before the days when they could measure their ROI, they set their budget and hoped for the best. Habits can be difficult to break.
  2. Bureaucracy. Mid-size and large organizations are not always nimble enough to reallocate money in the budget. So even if revenue is higher because marketing has been effective, redirecting some of that extra revenue into an expanded marketing budget never quite happens.
  3. Cash flow. You can’t spend money that you don’t have, no matter how well things are going.
  4. A lack of focus on cost of acquisition.

Comparing Cost of Acquisition: Digital Advertising vs. Affiliates

Clients tuned into their cost of acquisition will perk up when they hear that their ROAS is over 4x, because they see the opportunity to improve their margin. If Meta can generate a $100 booking for $12.50 (8x ROAS), but Tripadvisor charges $25 for that same $100 booking, investing in Meta—or any platform with a strong ROAS—is an easy decision.



Effective Acquisition Cost


Digital Ads, 4x ROMS


25%


Digital Ads, 8x ROMS


12.5%


Affiliate Sales


25%

Getting Realistic About Costs

I mentioned that a 25% commission is roughly equivalent to a 4x ROAS. That’s technically not true, for a couple of reasons:

  1. A 4x ROAS doesn’t actually mean that a dollar spent created $4 in revenue. If you want to dig into why, see how ROAS works and Is Your ROAS Inflated? A 25% Tripadvisor commission can be directly tied to your $100 sale, but the same can’t really be said about ad spend.
  2. Your ROAS from your first $1000 is going to be different (typically higher) than your ROAS from your last $1000.
  3. Labor costs. If you’re paying someone to create and manage your ads, you need to track ROMS—Return on Marketing Spend.

For the client represented below, we track every dollar spent on digital ads and agency labor, to calculate the average acquisition cost of direct revenue.

Tracking the cost of acquisition for affiliate vs. direct revenue. In this case, we chose all direct revenue; but you can get more conservative and track just online revenue, or just revenue attributed to ads.

Set a Cost of Acquisition Target Instead of an Ad Spend Budget

For many clients, it makes sense to keep investing in a given ad channel as long as the ROAS is high enough. For a lot of clients, “high enough” is defined as matching or beating other channels, such as OTAs—making 4-5x an acceptable floor. But “high enough” often looks different at different volume levels. We have a client with low variable costs, in a market where OTAs don’t have much traction. Their cost to serve 1 more guest is almost $0, so if they still have capacity after we’ve generated all the bookings we can at 4x, they’re willing to keep spending—all the way down to 2x—because otherwise, they’re leaving money on the table.

Change your question from “have we spent all the money I budgeted” to “how much is it costing me to generate the next booking, and am I profitable at that number?”

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.

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About The Author

Brian Nicholson

Brian is a partner at Blend Marketing. He focuses on brand strategy, positioning, and analytics for the tourism industry.

Email Brian

About The Author

Brian Nicholson

Brian is a partner at Blend Marketing. He focuses on brand strategy, positioning, and analytics for the tourism industry.