Setting an online marketing budget for the different channels is always a great challenge for any online marketer. The dynamic online market and the ever increasing number of competitors make it difficult to choose SEO and SEM investments as main channels.
This article will therefore present an easier and then a more detailed way of combining the online marketing budget with corporate planning. An example of the most important SEO and SEM tools will then be used to illustrate how you can define an online marketing budget for the most important application areas.
Definition of an online marketing budget starts with the annual corporate planning. This often includes all key operative planning parameters and distributes these to planning months as the key planning unit. Here, the corporate planning takes a close look at the company’s profit and loss calculations and compares the sales to costs in order to determine the profits.
Traditional corporate planning regularly compares the marketing costs to the overhead costs. This does not consider the fact that the online marketing costs resulting from the establishment of online marketing processes can have a direct impact on your products and cost bearers. For this reason, online marketing budgets can no longer be classified under the overhead costs such as brand advertising or corporate communication costs. Online marketing budgets can be included in contribution margin accounting as variable costs. This leads to a significant increase in transparency and justifies the motives behind the costs for performance calculations.
It is advisable to implement a multi-step process when setting your online marketing budget. This should start with the sales planning of your company.
The digital transformation in marketing currently has its focus on the customer journey and specific touch points that the user goes through before a conversion, i.e. before the marketing objective is achieved. Touch points are basically channels through which a company communicates with its customers. Therefore, this makes the various channels extremely important for corporate planning in the digitization era. The question that you must ask yourself is: What role should be played by which channel in order to ensure the success of our company?
These proportional contributions can be obtained from past values and developed gradually. Another probably more sensible approach is to refer to benchmarks for online use and individual product groups. These could consist of global online usage data and the online proportion of the individual product groups. If there is evidence that 20% of the sales can be achieved through the online shoe market, an essential benchmark can be set and taken up in the plan for online marketing. Benchmarks from competitors and comparable service providers are also helpful when you want to determine the sales share of a specific online channel.
This means:
(1) Online sales = Total sales x Online sales share
Once the online share is set on a sales level, the next step should be to determine the number of conversions that are required in order to obtain the specified sales. You can do this by dividing the planned sales with the average net shopping carts.
(2) Conversions = Online sales / Net shopping cart value
The net shopping cart value can also be obtained from a benchmark or amortized past values. An abstract review must be done for conversions that are not e-commerce conversions and that therefore do not present any direct monetary value. For instance, you can set a value per lead. In both cases – benchmark or amortization – a growth component can and should be integrated. This takes higher shopping cart values than in a benchmark or past values as a basis.
The next step should be to use the planned number of online conversions to determine the required number of visits. Several measures are required for this step as well. The key is the conversion rate specified for the planning. For areas that have high return rates, these too must be taken into account in the conversion rate. Here, the conversion rate is multiplied with the inverse of the return rate and then reduced correspondingly.
Example:
For a conversion rate of 4% and a return rate of 50%, the translated return rate amounts to 2%.
The number of the visits required for the planned sales is therefore:
(3) Conversions / Conversion rate = Visits
Example
33,333 visits are needed for 1,000 conversions with sales amounting to €60,000 and a conversion rate of 3%. This means €1.80 sales per visit.
Thus, defining the number of visits lays the essential basis for determining the online marketing budget.
Having the number of visits to be achieved through online marketing raises the next question: Which tools and with which budget can this be achieved?
You can follow two models when choosing which tools to use: The first one is the "Winner takes it all" approach. This allocates the entire online marketing budget to the most effective tool. The second is the portfolio approach in which multiple tools are used in order to minimize the risk. The strong>portfolio approach reduces the dependency on a single tool and should therefore be the most propagative. Search engine optimization (SEO), search engine marketing (SEM), display, email, and video advertising are regular components of the online marketing portfolio. This article will focus on the most important tools for simplification purposes on an SEO and SEM level.
The attractiveness of search engine marketing mainly lies in the high cost transparency and good controllability of the SEM campaigns. Every AdWords account gets a clear forecast for the click price to be paid and the clicks to expect. Thus, you can first define the entire SEM budget both on a product and aggregated campaign level:
(4) SEM total budget = Visits x Click price
Since AdWords itself uses daily budgets as a basis, you only need to convert the annual and monthly budgets based on the daily cycles. If your advertisements should not run constantly, you should also take this into account. The same applies if the total number of expected visits should be achieved through different campaigns. This requires you to calculate the campaign visits and the respective click prices for the respective campaigns.
Extensive experience in planning click prices comes in handy if the dynamics of the CPC on Google should be taken into account. The prices depend on different factors. One of the most common factors is the competition for relevant keywords. This often leads to a price increase especially in seasonal peaks. At the same time, a high quality factor achieved through the optimization of campaigns is also a way of reducing the click prices. In order to gain the hereby-needed experience, it is advisable to monitor the development of click prices constantly in online marketing controlling.
Whereas click prices can be determined directly as the cost for the online contact in search engine marketing, determining such contact costs in search engine optimization is not that easy. The following methods can be used:
The market price method assumes that AdWords click prices are market prices for an online contact established via the search engine. This hypothesis is based on the following consideration: SEM and SEO are substitutes. SEM is used whenever contact cannot be established through SEO and vice versa. If the SEM click price rises in an uneconomical way, companies opt to strengthen their SEO measures. This reduces the SEM click price and raises the costs for the SEO measures. In turn, AdWords activities are enhanced accordingly thereby leading to an increase in the SEM click prices and so on. As a result, the SEO and SEM click and contact prices continue to converge.
Alternatively, you can determine SEO click prices by calculating the entire costs of SEO and dividing these with the total number of established contacts. The costs of SEO measures include external agency costs, own personnel expenses, and costs for the content created for SEO. Website maintenance costs also fall in this category. However, the SEO contact prices are always determined retrospectively with the total cost method. Here, the SEO total costs are divided by the number of visits achieved through SEO measures.
The total cost method becomes complicated since, unlike search engine marketing, search engine optimization has a long-term effect. A SEO text only leads to positive rankings and hence visits through its medium or long-term impact. The long-term effects of SEO also depend on the competition. The development of the search engine technology is also a relevant factor. Both these factors are essential to the rankings in search engines and hence to the number of visits. Determining the actual costs of a click therefore depends on three external factors that are difficult to determine.
Even if the actual costs are always the best basis for defining a budget, the total cost method presents difficult hurdles for the ex-ante determination of SEO contact prices. As a result, SEM click prices are therefore more common. A cost advantage should be achieved through the organic search for the long-term if one manages to establish sustainable content that is relevant to users and search engines.
You can therefore define your SEO budget using the SEM click prices. This results in an SEO – SEO total budget.
(5) SEO- & SEM total budget = Visits x CPC (SEM)
This total budget should then be distributed over both instruments based on a portfolio weighting. A typical value for the SEO share of the total number of visits is around 60%. This relatively high value ensures visits despite significant fluctuations due to seasonal or competitive effects. On the other hand, a high amount of SEO traffic results in increased dependency on the Google ranking, which is generally much harder to influence.
Online marketing provides an excellent basis to objectify important business decisions such as defining marketing budgets. This article has shown that the basic approach is not complicated. This derives the required number of online contacts from the sales forecast. The derived number of online contacts then makes it possible to define the online marketing budget using click prices. However, budget planning becomes complicated if you take into account the specific aspects of the individual online marketing instruments as demonstrated by the example of calculation of the SEO budget.
With the increasing automation of online marketing processes, the thereby resulting "blurring" in online marketing has to be eliminated in order to further enhance the efficiency. This positive development can however be counteracted by the increasing complexity associated with new channels and instruments.
Published on 08/04/2016 by Dominik Große Holtforth.
Prof. Dr. Dominik Große Holtforth teaches business studies and media management at Fresenius University of Applied Sciences in Cologne. He is also head of the e-Commerce department which deals with strategy-related questions, the controlling of key performance indicators as well as competition strategies in online marketing and e-Commerce. Prof. Große Holtforth is co-founder of the e-Commerce agency Warenkorb.com and founder of the online plant shop “Meine Orangerie.” This is how he combines scientific expertise and practical experience.