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Budgeting for advertising is a challenge. It seems that the amount you spend on advertising changes frequently. Sometimes you can control these changes, such as running more or fewer ads. Other times you cannot, as the costs of advertising can simply increase.
With the cost of advertising changing so often, you might wonder, “Is advertising a variable cost?” Once you know the answer, you can budget for advertising more effectively and look for ways to keep the costs low while improving your results.
Let’s look at variable costs to see if advertising fits the bill.
A variable cost is a cost that changes depending on how much of a product or service you produce. For example, if you run a lawn care company, the amount of fertilizer you buy is a variable cost. You buy more if you provide more lawn service, and less if you don’t.
Examples of variable costs include raw materials for your products, supplies for services, fuel for company vehicles, shipping expenses, and more. These are costs that are directly related to how much you provide to your customers.
When you look at advertising, it’s clear that the advertising costs do not increase when you make more sales, and decrease when you make less. As a result, even though ad costs can vary a lot, they are not considered a variable cost.
Instead, advertising is a fixed expense — something that remains constant no matter how many products or services you provide to consumers. It seems odd that something that changes so often is a fixed expense, but because it’s not linked to your production, that’s the correct definition.
Knowing the answer to “Is advertising a variable cost?” can help you budget for this important part of your business. Because you can control how much you advertise, regardless of how much your business grows, you can make smart choices about ads.
The most important thing to focus on with advertising is your return on investment (ROI). That means you want to make more from your ads than you spend on them. You can only do that when your ads are highly effective and targeted, bringing in ideal leads and customers regularly.
It may cost a bit more to make your advertising more focused and less general in nature, but it more than pays for itself. It’s better to spend a little more if it improves your ROI overall.
The other element of your advertising budget is understanding how much a customer is worth to you when they purchase from your business. For example, if the average customer makes a one-time purchase of $100, then the customer lifetime value is $100. However, if the average customer gets a one-year contract worth $1,000, then the lifetime value is $1,000.
The higher your customer lifetime value, the more you can afford to spend to acquire a customer. That means you can have a higher advertising budget without damaging your ROI. For instance, you’d never spend $200 to acquire a customer worth $100, but you definitely would to acquire a customer worth $1,000.
There are two ways to improve your advertising ROI: lower advertising costs and increase the customer lifetime value. Many business owners overlook the second option. What can you do to improve customer loyalty and increase the average ticket price? Perhaps bundling your products or services would help, or you could create a subscription or membership.
When customer value is high, your advertising costs can be higher while still maintaining your profitability.
Many business owners make the mistake of thinking that marketing and advertising are the same. They are not, although advertising is one type of marketing.
Other marketing options can help you draw in new customers consistently without having to spend regularly on advertising. For example, search engine optimization (SEO) attracts customers who are already searching for your product or service on Google, helping you connect with buyers when they are most ready to make a purchase.
SEO takes some time to establish — you have to earn your way onto the first page of Google’s search results. However, once you do, you can spend a lot less on advertising while still getting customers and ideal leads regularly. This can dramatically improve your profitability and help you grow more quickly.
The best approach for any small business is to combine advertising, which can bring quick wins, with long-term marketing methods like SEO. Over time you’ll have a strong digital presence and brand, which will allow you to grow your business.
Best of all, you’ll save money as you transition your budget away from advertising. It’s no secret that advertising is expensive and as soon as you stop paying, you lose your exposure. SEO isn’t like that — once you earn your position you can maintain it without having to pay for ads over and over.
If you’d like help balancing advertising and SEO, we’re here for you. Local SEO Search has helped thousands of small businesses succeed with building a strong online presence and connecting with ready-to-buy customers. Contact us for a free consultation today!