Spending Enough on Advertising? How to Forecast Ad Spend

Check Out Your Historical Ads Data

How can you perform a predictive spend analysis? The best way to forecast ad spend is to take a look at the status quo. Pull your advertising program data for the last 12 months, including ad spend, orders, revenue, and cost of goods. (If you’re not accounting for the cost of goods in your advertising strategy, you should be. Read this whitepaper to see why!)

Now, you can calculate profit driven by your ads, and the percentage of revenue that was preserved as profit, otherwise known as contribution margin. 

As an example, let’s consider the following retailer, which primarily sells hockey gear. 

Ad Group
Cost of Goods
Ad Spend
Bauer Youth Hockey Helmet
CCM Jetspeed Hockey Shoulder Pads
Bauer Supreme Elbow Pads
Premier Licensed NHL Jerseys
Warrior Alpha Hockey Gloves
CCM Jetspeed Hockey Skates
Smart Hockey Training Puck
CCM RibCor Hockey Stick

In the above table, you can see that profit varies across ad groups. Some, like CCM RobCor Hockey Stick, produce a lot of profit — 30% of revenue! On the other hand, the ad group for Bauer Supreme Elbow Pads isn’t creating any profit at all. In fact, this ad group is losing money for the program. 

Forecast Your Ideal Ad Spend 

Now, you need to figure out whether your previous ad performance maximized profit — or if you missed some opportunities along the way! 

We typically recommend evaluating your current target margin, compared to the total available margin. What percentage of available margin was invested as ad spend? Are you comfortable with that percentage, or do you need to aim higher or lower?

Looking again at the example, you can see target margins are now included for the hockey retailer below. 

Ad GroupRevenueCost of GoodsAd SpendProfitMarginTarget Margin
Bauer Youth Hockey Helmet$127,489.0074.00%$10,422.00$22,725.1417.83%10.40%
CCM Jetspeed Hockey Shoulder Pads$129,573.0066.00%$11,940.00$32,114.8224.79%17.00%
Bauer Supreme Elbow Pads$73,082.0074.00%$23,145.00-$4,143.68-5.67%15.60%
Premier Licensed NHL Jerseys$129,545.0081.00%$24,249.00$364.550.28%11.40%
Warrior Alpha Hockey Gloves$120,046.0075.00%$21,428.00$8,583.507.15%11.25%
CCM Jetspeed Hockey Skates$63,854.0054.00%$10,406.00$18,966.8429.70%25.30%
Smart Hockey Training Puck$85,833.0085.00%$9,253.00$3,621.954.22%9.00%
CCM RibCor Hockey Stick$108,495.0058.00%$12,371.00$33,196.9030.60%27.30%

Here, the percentage varies widely according to the cost of goods for each ad group. Obviously —you can’t preserve more as profit than is available to you after accounting for cost of goods, and realistically you need to set some aside as ad spend as well.

We usually recommend aiming for very minor changes at first, unless the ad group itself is entirely unprofitable. In that case (assuming you don’t want to simply break even on your ads), take a look at your individual business goals, and develop a target from there. If you’re not sure where to start — check out this guide to choosing contribution margin!

See Where You Missed The Mark

Compare the results from last year to your ideal scenario. Did your campaigns hit their targets?

Now, you can calculate the spend you would have needed to meet those targets using a predictive spend analysis. (Hint: It might be more or less, depending on your targets and how close you were to meeting them.) To do forecast ad spend, calculate the percentage of revenue that would have been a) cost of goods, and b) your profit. The remainder is what you would have needed to spend on ads to achieve your ideal profit! 

Let’s return to our example. 

Ad GroupRevenueCost of GoodsAd SpendProfitMarginTarget MarginTarget Spend
Bauer Youth Hockey Helmet$127,489.0074.00%$10,422.00$22,725.1417.83%10.40%$19,888.28
CCM Jetspeed Hockey Shoulder Pads$129,573.0066.00%$11,940.00$32,114.8224.79%17.00%$22,027.41
Bauer Supreme Elbow Pads$73,082.0074.00%$23,145.00-$4,143.68-5.67%15.60%$7,600.53
Premier Licensed NHL Jerseys$129,545.0081.00%$24,249.00$364.550.28%11.40%$9,845.42
Warrior Alpha Hockey Gloves$120,046.0075.00%$21,428.00$8,583.507.15%11.25%$16,506.33
CCM Jetspeed Hockey Skates$63,854.0054.00%$10,406.00$18,966.8429.70%25.30%$13,217.78
Smart Hockey Training Puck$85,833.0085.00%$9,253.00$3,621.954.22%9.00%$5,149.98
CCM RibCor Hockey Stick$108,495.0058.00%$12,371.00$33,196.9030.60%27.30%$15,948.77

You can see this retailer needs to increase spend in some places to match margin targets (like the CCM RibCor Hockey Stick group) and reduce spend in others (like the Warrior Alpha Hockey Gloves group.)

Taking the Next Steps in Predicting Ad Spend 

Did you spend enough on advertising — or did you leave profit on the table?

Analyzing last year’s performance is really only half the story. If you want to see the impact this additional spend will have on your revenue and profit in the upcoming year, continue on to a predictive spend analysis! This report models the effect additional spend will have on your campaigns, giving you the full picture of your program’s potential.

Read our whitepaper, Predictive Spend Analysis: How to Forecast Cost and Revenue, to learn how to model the impact of changes in spend!


Christina is the Marketing Manager at Omnitail. She spent several years doing content, PPC, and email marketing for retail and tech companies before starting as an SEM Analyst at Omnitail. Christina now manages Omnitail's various marketing initiatives and enjoys reading and writing about trends in digital marketing.

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