Money

How much should ecommerce companies spend on advertising?

I was asked this brilliant question on Quora. Imagine you were offered $2 in return for $1. What would be your budget? The answer of course is that your budget would be as much as possible because you would be instantly doubling your money!

That’s broadly the answer to this question. When we’re talking about direct marketing (which after 50 years has recently been re-named “performance marketing” for some reason) you should always be getting back more than you spend.

There are a couple of kinks. First off, you will not get the money back instantly. If you look at the Direct to Consumer Napkin you will see I suggest it might take 6 months to 2 years to get your return, so you might need funding to cover the gap between spending to get the customer and the customer becoming profitable.

The other big problem is that direct marketing always gets harder so there will be a limit to how much you can spend while still getting your return.

But going to back the original question: in the ecommerce businesses I’ve ran (or even at Machine Labs!) there isn’t really a concept of a marketing budget. There is sensible Customer Acquisition Cost (CAC) target and provided that is hit, the bigger the marketing spend, the better.

If you really can spend $1 to get $2 then you should not set a limit on your budget. Just spend the most money you can get away.

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