Travel and Hospitality Marketing
How to Calculate
a Marketing Budget?
a Marketing Budget?
Determine the Right Advertising Budget and Choose the Most Profitable Marketing Channels
1
Step One: Grab Your Calculators
Almost every client who comes to me asks the same questions: How much money should I allocate for advertising? What should my marketing budget be? How many clients will I get?
Irene Kirillova
AK Marketing
To accurately calculate the budget and forecast results, we need to have the following figures:
- Average check (customer's purchase value)
- Profit per sale (to ensure we don’t operate at a loss when setting the budget)
- Customer acquisition cost (e.g., how much we pay per ad click)
- Conversion rate (actual or estimated)
We know that the average check in our business is, say, €5,000, and the net profit per sale is €1,300.
Understanding this number sets the upper limit on how much we can invest in advertising. If the customer acquisition cost equals or exceeds this amount, we will operate at a loss.
Understanding this number sets the upper limit on how much we can invest in advertising. If the customer acquisition cost equals or exceeds this amount, we will operate at a loss.
The next crucial factor to determine is the customer acquisition cost.
For example, if we plan to run a social media ad campaign with a "Traffic" objective, we need to know the cost per click (CPC) on our ad. If you have previously managed campaigns on this platform, you likely have an estimated CPC based on past data.
For example, if we plan to run a social media ad campaign with a "Traffic" objective, we need to know the cost per click (CPC) on our ad. If you have previously managed campaigns on this platform, you likely have an estimated CPC based on past data.
If you are launching ads on this channel for the first time, there are two ways to estimate your costs:
- Ask industry colleagues about their approximate CPC figures.
- Use benchmark data as a starting point.
Next, we need to determine the conversion rate.
When it comes to online advertising, the easiest way to do this is by checking your analytics system, such as Google Analytics. However, this requires properly configured conversion goals to track user actions effectively.
If you haven’t set up conversion tracking yet, I strongly recommend making it a priority as soon as possible.
When it comes to online advertising, the easiest way to do this is by checking your analytics system, such as Google Analytics. However, this requires properly configured conversion goals to track user actions effectively.
If you haven’t set up conversion tracking yet, I strongly recommend making it a priority as soon as possible.
Conversion rates can vary significantly depending on your niche, website quality, and traffic sources.
In our hypothetical example, let’s assume a website conversion rate of 1%.
Now, we have the following key numbers:
With these figures, we can now calculate how much we need to spend on advertising to acquire one customer and determine whether our marketing efforts will be profitable.
In our hypothetical example, let’s assume a website conversion rate of 1%.
Now, we have the following key numbers:
- Profit per sale: €1,300
- Cost per click (CPC): ~€1,5
- Conversion rate: 1%
With these figures, we can now calculate how much we need to spend on advertising to acquire one customer and determine whether our marketing efforts will be profitable.
2
Step Two: Set Your Goals
There are two approaches to determining an advertising budget:
How to Calculate the Budget Using This Approach?
Let’s assume our target revenue is €150,000.
- Goal-Based Approach: We set specific targets—how many clients (X) we want to acquire and how much revenue (Y) we aim to generate next month.
- Resource-Based Approach: We allocate a fixed budget (Z) that we can afford to spend on marketing and maximize results within that limit.
How to Calculate the Budget Using This Approach?
Let’s assume our target revenue is €150,000.
- Our average check is €5,000, so we need 30 sales (€150,000 ÷ €5,000) to reach our goal.
- Now, how do we achieve this? Let’s break it down.
Goal-Based Approach
Since we know that our website conversion rate is 1%, we can calculate that for every 100 visitors, we get 1 purchase.
Now, to achieve 30 sales, we use a simple formula:
(100×30)÷1=3,000
This means we need to attract 3,000 visitors to our website.
Next, using our estimated cost per click (CPC) of €1.50, we calculate the required budget:
3,000×1.50=€4,500
Thus, our estimated advertising budget to reach 30 sales is €4,500.
Now, to achieve 30 sales, we use a simple formula:
(100×30)÷1=3,000
This means we need to attract 3,000 visitors to our website.
Next, using our estimated cost per click (CPC) of €1.50, we calculate the required budget:
3,000×1.50=€4,500
Thus, our estimated advertising budget to reach 30 sales is €4,500.
Don't take the numbers in this example as a reference. I chose these figures for illustration and easy calculations. Naturally, different tourism businesses and regions will have their own unique metrics.
Irene Kirillova
AK Marketing
Resource-Based Approach
The second approach to budgeting is based on the available resources we can invest in promotion.
Let’s assume we have €30,000 to spend. With a cost per click (CPC) of €1.50, we can drive an additional 20,000 visitors to our website.
At a conversion rate of 1%, this would result in 200 sales.
With an average check of €5,000, our total revenue would amount to €1,000,000.
Let’s assume we have €30,000 to spend. With a cost per click (CPC) of €1.50, we can drive an additional 20,000 visitors to our website.
At a conversion rate of 1%, this would result in 200 sales.
With an average check of €5,000, our total revenue would amount to €1,000,000.
Remember, I mentioned earlier that our profit per sale is €1,300?
With advertising costs of €4,500, we will acquire 30 clients (or with a budget of €1,500, we will get 10 clients).
This means that each customer acquisition costs us €150.
However, since our profit per sale is only €1,300, this means we are operating at a profit, not a loss—but the margin is tight, and further optimizations may be needed.
With advertising costs of €4,500, we will acquire 30 clients (or with a budget of €1,500, we will get 10 clients).
This means that each customer acquisition costs us €150.
However, since our profit per sale is only €1,300, this means we are operating at a profit, not a loss—but the margin is tight, and further optimizations may be needed.
Calculation Explained
Given data:
We know that to acquire 30 clients, we need 3,000 visitors (since 1% of them will convert into a purchase).
If each click costs €1.50, then the total advertising expense for 3,000 visitors is:
3,000×1.50=€4,500
Now, let’s calculate the cost of acquiring one customer:
Total advertising cost ÷ Number of customers
4,500÷30=150
So, each customer costs us €150 to acquire.
Comparing with Profitability
Since our net profit per sale is €1,300 and we spend only €150 to acquire one customer, we are actually making a profit of €1,150 per sale.
- Profit per sale: €1,300
- Ad budget: €4,500
- Website conversion rate: 1%
- Cost per click (CPC): €1.50
- Average check: €5,000
- Target number of clients: 30
We know that to acquire 30 clients, we need 3,000 visitors (since 1% of them will convert into a purchase).
If each click costs €1.50, then the total advertising expense for 3,000 visitors is:
3,000×1.50=€4,500
Now, let’s calculate the cost of acquiring one customer:
Total advertising cost ÷ Number of customers
4,500÷30=150
So, each customer costs us €150 to acquire.
Comparing with Profitability
Since our net profit per sale is €1,300 and we spend only €150 to acquire one customer, we are actually making a profit of €1,150 per sale.
We have several ways to influence the final result:
- Increase the average check
- Lower the cost per click (CPC) in advertising
- Improve website conversion rates
- Find more cost-effective traffic acquisition channels
- Operate at a temporary loss (for example, if we have a high customer return rate and strong LTV, knowing that it will be profitable in the long run)
Conclusions
Money loves to be counted. Every financial investment should be carefully evaluated in advance.
To forecast advertising expenses, you don’t need fortune tellers, crystal balls, or coffee grounds readings. As you can see in practice, these numbers can be calculated logically and independently.
To forecast advertising expenses, you don’t need fortune tellers, crystal balls, or coffee grounds readings. As you can see in practice, these numbers can be calculated logically and independently.
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