Why You Shouldn’t Cap Your Ad Budget, and What You Should Do Instead

In the competitive world of digital marketing, setting a fixed ad budget can often leave money on the table. Many tourism companies cap their advertising spend even when their return on ad spend (ROAS) is high. This article explores why capping your ad budget might be holding you back and what you should do instead to maximize your growth and revenue.

Why Tourism Companies Cap Their Advertising Budgets

Habit

Before the days of measurable ROI, businesses set their budgets and hoped for the best. Old habits die hard, and many companies still operate this way, even though they can now track their returns in real-time.

Bureaucracy

Mid-size and large organizations often struggle with reallocating budgets quickly. Even if marketing efforts are driving higher revenue, redirecting some of that extra income back into an expanded marketing budget can be a slow process.

Cash Flow

You can’t spend money you don’t have. Even if your campaigns are performing well, cash flow constraints can limit your ability to increase your ad spend.

Lack of Focus on Cost of Acquisition

Many businesses don’t focus enough on their cost of acquisition. Understanding how much it costs to acquire a customer through different channels can help make more informed budget decisions.

Comparing Cost of Acquisition: Digital Advertising vs. Affiliates

Clients who understand their cost of acquisition will see the opportunity to improve their margins when they hear their ROAS is over 4x. For example, if Meta can generate a EUR 100 booking for EUR 12.50 (8x ROAS), but Tripadvisor charges EUR 25 for the same booking, investing more in Meta becomes an easy decision.

Effective Acquisition Cost

• Digital Ads, 4x ROAS: 25%

• Digital Ads, 8x ROAS: 12.5%

• Affiliate Sales: 25%

Getting Realistic About Costs

A 25% commission from an OTA like Tripadvisor is straightforward, but a 4x ROAS from digital ads doesn’t mean a dollar spent creates $4 in revenue. Here’s why:

• ROAS Variability: Your ROAS from the first EUR 1,000 spent is typically higher than from the last EUR 1,000.

• Labor Costs: If you’re paying someone to manage your ads, you need to track ROMS—Return on Marketing Spend.

For example, we track every dollar spent on digital ads and agency labor to calculate the average acquisition cost of direct revenue for our clients.

Set a Cost of Acquisition Target Instead of a Maximum Ad Spend Budget

For many clients, it makes sense to keep investing in a given ad channel as long as the ROAS is high enough. For some, “high enough” means matching or beating other channels, such as OTAs—making 4-5x an acceptable floor. However, “high enough” can vary based on volume levels. For instance, a client with low variable costs and minimal OTA competition might continue spending down to a 2x ROAS because the marginal cost of serving one more guest is almost zero.

Change your question from “Have we spent all the money I budgeted?” to “How much is it costing me to generate the next booking, and am I profitable at that number?”

The Benefits of Not Capping Your Ad Budget

Maximized Growth Potential

By not capping your ad budget, you allow your business to grow as long as the returns justify the spend. This approach ensures that you’re not leaving potential revenue on the table.

Better Market Penetration

Continuous investment in advertising helps you maintain and increase your market share. It keeps your brand top-of-mind for potential customers and helps you stay ahead of competitors.

Increased Flexibility

Without a fixed budget, you can quickly reallocate funds to the best-performing channels, ensuring that your marketing efforts are always optimized for maximum returns.

Who Should Consider This Approach?

Businesses with High ROAS

If your campaigns consistently deliver a high ROAS, it makes sense to continue investing in them. The more you spend, the more you earn, as long as the returns justify the investment.

Companies with Flexible Cash Flow

Businesses that can manage their cash flow effectively and reinvest profits into marketing will benefit the most from this approach. It allows for continuous growth and scaling.

Data-Driven Organizations

Companies that track their marketing performance closely and make data-driven decisions are well-suited to this strategy. Understanding your cost of acquisition and ROAS is crucial for optimizing your ad spend.

The Opportunity for You

By shifting your focus from a fixed ad budget to a cost of acquisition target, you can maximize your growth potential and achieve better returns on your marketing investment. This approach allows you to continuously optimize your campaigns and ensure that every dollar spent contributes to your bottom line. If you’re ready to explore this approach for your business, Digital Mudra is here to help. Our team of experts can guide you through the process, optimize your campaigns, and drive better results for your travel business.