My question is, how should we decide how much money to spend on advertising if the return on this advertising isn't easily measured?
For example, spending it on an adwords campaign to acquire new leads in an online lead-gen business when the leads are included as part of a subscribers monthly fees. Getting our subscribers more leads obviously should increase retention rates but its hard if not impossible to measure.
If we did decide to stop advertising because we couldn't prove the value was there, then we'd be losing out hugely to our competitors in the same space who are blowing out our search terms on adsense and consistently showing up in the #1 paid spot. We know we are losing market to them but its very hard to say how much exactly. We are concerned that if we allow this to go on for much longer that it will really erode our business. Hence we are considering additional spend to curb this erosion even though it is difficult to measure. But how much spend is the question.
One idea would be to shift our pricing model so that we charge per lead, which would make it easier to track whether or not the spend was paying for itself, but we aren't sure we want to do this just yet.
A second example woud pertain to SEO, buying inbound links to increase SEO relevancy. You dont really know how many links will bump you up to that next spot in the SERPS, nor can you even accurately estimate how much money an additional spot up will mean for your business w/o taking a wild guess. So, how much to spend?
Well the good thing about Adwords is you can set you budget so it doesn't get out of control. So worst case scenario you can only compete competitively with the competition for a couple hours a day before your budget is out.
How much is dependent on: what you can afford, what it costs per click, how many clicks you would get in a day, how many leads you would expect and many other factors. Plus, leads in the law/attorney realm are like $50/click and leads in less competitive areas are a fraction of that. There are too many factors to throw a figure at you based on the info provided.
I think what is important for you is to start and try it out. Setup a budget of something you can afford and not have to worry about hurting your business too bad if it doesn't bring in the leads. But measure everything. How many people come to your site from the ads, what ads they clicked on, did they convert into a prospect / fill out a form on your site etc. Make sure to set up all the proper analytic stuff to get that data so you can make educated decisions after you get started. But you just need to pick a budget to get started so you can get data, learn and make decisions. Try $500/mo, see how long that keeps you playing.
But I do have a decent idea of what you are facing. Sounds like you run a website or a community that people subscribe to for a certain monthly fee with the idea that people will come there and find them and contact them for work. So it's YOUR job to get the prospects to the site. If you aren't getting people to the site, then your members aren't getting leads, and won't be members for long.
I'd also strongly suggest not just buying inbound links. It's a lot more complicated then that, and Google is not dumb. The worst thing you can do is get yourself blacklisted by purchasing links or growing your inbound links recklessly.
There are a few flawed assumptions made that make your analysis more challenging.
"you dont really know how many links will bump you up to that next spot in the SERPS" - this is somewhat measurable, what is your page rank? what is the page rank of a competitive site(s) that appears above you for your top keyword(s)? Check your rank and that of your competitors on opensiteexplorer.org and see what the inbound links are, both quality and quantity. You will get an idea of how far behind your competitors you are in SEO.
"Getting our subscribers more leads obviously should increase retention rates but its hard if not impossible to measure." - You should use SEM (AdWords) to get more subscribers rather than leads, and track conversions (subscriptions) so you know whether the money is worth spending or not.
"buying inbound links to increase SEO relevancy" - why buy? Did you max out on free SEO tactics? If you look around this site you will find links to many SEO tools, some free and those that are paid have free trials.
It seems you are considering ad campaigns for both new customer acquisition and product development (generating leads) for retention. Do you already have a retention problem with your existing customers because of the product value or are you worried about not getting new customers because your competitors are spending on exposure? The answer should determine what your priority should be - acquisition or retention.
Oh, and I would recommend running a small budget campaign on AdWords. It's rumored that Google favors paying customers in SERP, and I had seen it work that way, so you get a dual benefit. Even if you don't want to focus on SEM, run a campaign with a $5/day budget and 3-5 keywords (cycle through keywords to find conversion winners and then run those).
You don't need to know the ROI of a channel to figure out the budget. You just need to know the lifetime value (LTV) of customers acquired through it, which is simplified to all the revenues from one customer minus all the costs to support that customer (though it's a bit more complex than that ). You also need to know how much of the LTV you want to keep as profit and how many customers you want to sign up per month from that channel. The customer acquisition (CA) budget will be
(LTV - profit) × new customers.
For example, the LTV is ¤100.00, you want to keep 20% of it, and you want to sign up 50 new customers per month - thus, your budget will be
(¤100.00 - ¤100.00 × 20%) × 50 = ¤4,000.00.
If you need to calculate the maximum price per click, then you'll need to know the conversion rate from lead to paying customer (i.e. what percentage of those who click the ad sign up as customers). The max price will be
CA × conversion. For example, the LTV is ¤100.00, the retained profit is 20%, and conversion rate is 10% - thus, max price per click is
(¤100.00 - ¤100.00 × 20%) × 10% = ¤8.00, which gives you 10 clicks ¤8.00 each and 1 of them (10%) will become a customer.
As for SEO, don't waste your time on retaining "link builders" because that's a questionable practice and you never know what update to Google algorith kill your SERP placement. Instead, focus on media & blogger relations to generate real, valid mentions and on building a quality product because that will result in referrals by current customers, which is free promotion.
Sometimes you can't outspend a competitor. Stay as close as you can for as long as you can if it will turn you a profit. If not, back off now.
Have you tried other forms of advertising. Facebook ads are a less tapped resource and are highly targeted. Also, do you have something of value to your audience that you can giveaway. Run a competition and leak the info to bloggers in you industry.
Look for creative ways to not only bring direct traffic right now, but to bring sustainable trust authority that will drive you up in the SERPs and solidify the positions you attain. This work done now will also bring a continual stream of traffic from the places you build it.
Pat Flynn of smartpassiveincome.com has a great podcast called How to be Everywhere In the podcast he talks about how he uses multiple avenues of disseminate his message to drive his traffic and ultimately his sales.