Budgets, cost per lead and break-even

An ad budget should come from the bookings you need and what each one is worth, not from a round number that feels safe. Learn how to build a budget from targets, calculate break-even ad spend and return on ad spend, size a fair test and shift money through the seasons.

Read the transcript

Budgets, cost per lead and break-even.

Ask most small business owners how they set their ad budget and the answer is a number that felt comfortable: 500 dollars a month, maybe 1,000. dollars

That number has nothing to do with how many bookings they need, what a booking is worth, or what a lead costs.

The four numbers.

You need four figures, all from your own records.

The first two come from earlier modules; the second two come from your ad tests.

Build the budget from the target.

Work backwards from the bookings you want ads to produce.

Here is a worked example for Lantern and Lane's spring wedding campaign, using the numbers from their first Google test.

Break-even: when ads pay for themselves.

Revenue is not profit.

A campaign that brings in 5,000 dollars of bookings for 2,000 dollars of ads may lose money if delivering those events costs 3,500. dollars

Repeat clients change the sum.

A wedding couple usually books a planner once.

A corporate client who books a holiday party may book a summer event and next year's party too.

Size a fair test.

Two leads in a week tells you nothing; twenty leads starts to tell you something.

To judge a channel, aim for enough budget to produce at least 15 to 20 leads.

That is the lesson. The worksheet and the quiz are just below this video.

What you will be able to do

• Build a monthly ad budget from booking targets, close rates and cost per lead
• Calculate break-even return on ad spend from your gross margin
• Size a test budget, set scaling rules and allocate spend across the event seasons

Ask most small business owners how they set their ad budget and the answer is a number that felt comfortable: $500 a month, maybe $1,000. That number has nothing to do with how many bookings they need, what a booking is worth, or what a lead costs. A budget built that way is either too small to learn anything or larger than the business can recover. There is a better method, and it takes ten minutes with a calculator.

The four numbers

You need four figures, all from your own records. The first two come from earlier modules; the second two come from your ad tests.

From these, two more follow. Cost per booking is cost per lead divided by close rate. Return on ad spend, often shortened to ROAS, is the revenue a campaign produced divided by what it cost.

Build the budget from the target

Work backwards from the bookings you want ads to produce. Here is a worked example for Lantern & Lane’s spring wedding campaign, using the numbers from their first Google test.

1. Target: 6 extra bookings from ads between January and April.
2. Close rate on ad leads: about 17 percent. Leads needed: 6 divided by 0.17 equals about 36 leads.
3. Cost per lead from the test: $75. Budget needed: 36 multiplied by $75 equals $2,700.
4. Over four months, that is $675 a month, or about $22 a day.

Now the budget has a reason. If Priya and Marco want more bookings, they can see the cost. If the cost per lead rises, they can see what it does to the plan before it happens.

Break-even: when ads pay for themselves

Revenue is not profit. A campaign that brings in $5,000 of bookings for $2,000 of ads may lose money if delivering those events costs $3,500. The test is gross margin, and it gives you a single number to aim for.

Break-even ROAS equals 1 divided by gross margin.

• A planner with a 55 percent gross margin breaks even at a ROAS of 1 divided by 0.55, about 1.8. Every dollar of ads must bring in at least $1.82 of bookings.
• A caterer with a 35 percent gross margin, because food and staff are costly, breaks even at 1 divided by 0.35, about 2.9.
• A rental company with a 70 percent margin on owned inventory breaks even at about 1.4.

Break-even means the ads covered their cost and the direct costs of the work, with nothing left over for overhead or profit. Most businesses should aim well above it. A sensible target is two to three times your break-even ROAS, depending on how much of your overhead and owner’s pay you want ads to carry.

Check the caterer from the Meta lesson: $23,200 of bookings from $900 of ads is a ROAS of about 25.8, far above the 2.9 break-even. That is unusually good, which is a reason to check the tracking and then to spend more, carefully.

Repeat clients change the sum

A wedding couple usually books a planner once. A corporate client who books a holiday party may book a summer event and next year’s party too. If your typical corporate client is worth three bookings over three years, you can rationally pay more to win the first one, as long as you have evidence that clients really do come back. Use lifetime value with caution: count only repeat business you have actually seen in your records, not what you hope for.

Size a fair test

Small numbers lie. Two leads in a week tells you nothing; twenty leads starts to tell you something. To judge a channel, aim for enough budget to produce at least 15 to 20 leads.

If you expect leads at around $80, a fair test needs roughly $1,200 to $1,600. If you cannot fund that over two or three months, choose a narrower test, such as one service, one area and one season, rather than a thin spread across everything. Decide before you start how many leads you need to see before you judge, and do not change the campaign every few days. Constant tinkering resets the platform’s learning and leaves you with no clean result at all.

Scaling rules

When a campaign works, the temptation is to double the budget overnight. Results rarely double with it. As you spend more, ads reach less interested people and cost per lead tends to rise. Copy these rules:

1. Raise budgets gradually, by about 20 to 30 percent at a time, and wait a week or two before the next increase.
2. Watch cost per booking, not cost per click. Scale only while it stays below your target.
3. When a channel’s cost per booking rises above target at a higher budget, step back to the last level that worked.
4. Keep a small, steady test budget for new ideas, roughly a tenth of your ad spend.

Plan the year by season

Spend when buyers are deciding, not when you happen to have cash. Here is Lantern & Lane’s annual plan, built from the target method.

Total: $2,700 plus $600 plus $1,200 plus $600, or $5,100 for the year. Against a target of about 11 extra bookings at an average of $6,500, that is roughly $464 per booking, below the studio’s $975 maximum, with room for things to go worse than planned.

In Canada and the GTA

Use revenue before HST. In Ontario, HST is 13 percent, and the tax you collect from clients belongs to the government, not to you. Calculate booking value, gross margin and ROAS on prices before HST, or every figure in your budget will look about 13 percent better than it is. If you are not yet registered, remember that you stop being a small supplier once your taxable supplies exceed $30,000 in a single calendar quarter or over the last four consecutive quarters, and you must then register within 29 days. A growth plan that adds ad-driven bookings can push you over that line, so put it on the calendar. The CRA explains the rules in its guide RC4022.

If you are a GST/HST registrant, the tax charged on your business purchases, which can include advertising, may be recoverable as input tax credits, depending on how it was charged. Ask your accountant how your ad platforms bill you, and keep the invoices.

GTA costs and pricing. The cost of doing business in the GTA, from rent to staff wages to parking at downtown venues, is higher than in most of Ontario, and it shows up in gross margin. Two vendors with the same booking price may have very different break-even points depending on where they are based and how far they travel. Recalculate your margin at least once a year, especially after wage or supplier increases.

Corporate buying cycles. Many organizations set budgets for the calendar year, and some find unspent money late in the year that must be used before the year-end. Others run on a fiscal year that ends in March, which creates a spring rush to book events and spend remaining budgets. Ask corporate clients when their fiscal year ends, and schedule corporate ad spend a month or two before those windows.

Wedding cash flow. Wedding bookings in Ontario are often made a year or more ahead, with a deposit now and the balance close to the date. An ad campaign in January may produce bookings whose full revenue arrives the following summer. Your budget plan should show when the cash goes out and when it comes in, so a successful campaign does not create a cash squeeze.

Moving cultural dates. Many of the GTA’s biggest celebration seasons follow lunar or lunisolar calendars, so Lunar New Year, Ramadan and Eid, Rosh Hashanah and Diwali fall on different dates each year. A caterer, decorator or DJ who serves these events should rebuild the seasonal budget each year from the actual dates, starting spend six to ten weeks before each one, rather than copying last year’s months.

Discounts are a budget decision too

When ads underperform, the reflex is to add a discount. Price promotions have their own rules. If you advertise a “regular” price beside a sale price, the Competition Act’s ordinary selling price provisions apply. The Competition Bureau’s tests are that more than 50 percent of sales were at that price or higher within a reasonable period, usually within a year, before or after the promotion, or that you offered it in good faith at that price for a substantial period, usually within a year. A “regular price” you never actually charged is not a regular price. See the Bureau’s page on ordinary selling price claims.

A discount also cuts straight into gross margin, and so raises your break-even ROAS. Cutting a $4,000 booking with a 50 percent margin by 10 percent drops the margin to about 44 percent and raises break-even ROAS from 2.0 to about 2.25. Run that sum before you offer the discount.

This is general information, not legal or tax advice. Check the source, your accountant or a lawyer for your situation.

Worksheet

Download the worksheet and complete it for your own business, using Lantern & Lane as the model where it helps. Keep it with your marketing plan. It takes about 10 minutes.

Download the worksheet (PDF)