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Businesses can spend anywhere from 2-40% of revenues on marketing. If your profit margins are high you can support a much higher %. Similarly, if you sell a product that tends to generate lots of repeat orders, you can afford more.
You need to be able to track your ROI on advertising/marketing expenses. The first step is to be able to track all of your leads and sales and attribute them to a source. This can be difficult and may require some interpolation.
Second, calculate your ROI on the ad - example: you run a classified add in a magazine for $100/ month. You are able to attribute 18,000 in sales to this ad. Your gross margin on your product is 15%. You earned a gross margin of $2,700 versus expenses of $1,200. This is a ROI of 225%
Try to apply this simple system and keep the ROI's north of 100%
I'll throw one other variable into the mix: repeat sales. Many direct marketing companies LOSE money on ads, because they expect to profit on repeat sales to the customers. For example, they might run an ad that produces 100 new customers, but even after the profits on the orders are counted, they still lose $1000 on the ad. This means that each new customer cost them $10 - that's the cost of acquisition. Based on experience, though, they know that they'll recoup this in the coming year by additional sales to some of those new customers.
The companies with insane bids on Overture are no doubt playing this game. IMO, planning to lose money on your ad campaigns is a dangerous game unless you really know your costs and your customer behavior. If you miscalculate, your ad costs could put you out of business before your long-term sales catch up.
My basic costs go into additional hardware doodads, domain purchasing/hosting, and software. In general, I only buy what I need and what I know will help me make money.