21 Feb 2017

How to Determine How Much to Spend on PPC Advertising

A common question we get from new clients is “How much should we be spending in pay per click advertising per month?”

This is a great question, and in order to provide an answer, our PPC team would gather necessary information from the client, do some research, plug in some numbers, and provide a budget recommendation estimate. Let’s take a look at the process we go about for getting that recommendation so you can find your own answer, and how this all ties into what you’d like to accomplish with your PPC campaigns.

Determine the goals of your PPC campaign

A great place to start is to ask yourself what you’re trying to accomplish with your digital advertising campaigns. Are you looking to generate X number of new leads for your sales team, or would you like to generate $5 in sales for every $1 advertising dollar you spend? Are you looking to aggressively grow your business by acquiring X amount of new customers?

With those ideas in mind, you’ll then want to determine your campaign’s cost per lead goal. To get this, you’ll need:

  • Fixed cost of your product or services – we’ll call this average revenue per sale
  • Return on ad spend goal (ROAS)
  • Close rate – It is best if you have an actual calculated close rate on PPC leads, but if you don’t, use the closest close rate available to that such as close rate of online leads.

Now that you have the data points necessary, let’s calculate your cost per lead goal.

Calculating-Your-Cost-Per-Lead-Goal-Form-1-A

Calculating-Your-Cost-Per-Lead-Goal-Form-1-A

 

By way of example, let’s run through this with a fictional software company, NewApp. NewApp is a robust software that costs $2,500, and they want a 500% return on ad spend. They know they close an average of 10% of their online leads. Using the formulas above, we can then calculate their cost per lead goal:

Calculating-Your-Cost-Per-Lead-Goal-Form-1-B

Great! Now keep that number handy so that we can use it later on to help determine your budget.

Research estimated click costs

Now you need to estimate how much your clicks will cost by taking your top keywords you’d like to drive traffic for. AdWords has a great tool called Keyword Planner that can help you not only determine traffic estimates and click costs, but also build out your initial keyword list. Plug in your top keywords and gather the range of suggested bids the tool populates. If you plan to advertise on Bing, they have a similar tool as well that you can use for that segment of your traffic.

Once you get the suggested bid range, find a nice medium that you feel comfortable with in that range as your estimated cost-per-click in the campaign. For example, if I was researching for NewApp, I’d type in my top 20 or so keywords that I know from the tool will drive the most traffic, and may find a range of suggested bids from $2.50 to $6. We’re going to play it on the higher end and assume my estimated cost-per-click for our campaign will then be $5.

Track your Revenue from PPC Leads to Offline Sales icon

Want to dive even deeper into PPC ROI? Download our guide: How to Track Revenue from PPC Leads to Offline Sales.

How many leads do you want or can you handle?

Now that you know your cost-per-lead goal, and your estimated click costs, you then need to determine how many leads you want per month, or in some cases, how many leads your sales team can comfortably handle in a month. Once you determine that, you will use an easy way to calculate your budget, and then back it up with a longer way that will either validate your goals or help you set to more realistic goals.

Here’s the quick and easy way to determine your monthly PPC budget:

Form-2-A-Determine-Your-Monthly-PPC-Budget

For example, NewApp knows their sales team can handle 200 leads in any given month, so that’s their target lead volume. We determined above that their cost per lead goal is $50.

Form-2-B-Determine-Your-Monthly-PPC-Budget

For the longer route, you will need one more estimated number to determine your budget – conversion rate. If you’ve run similar ads before, take that conversion rate. If not, head into your Analytics and see how your website or landing page is currently converting traffic. You can take an average of that, or estimate a bit higher if you’re going to run targeted campaigns to a landing page that follows conversion rate best practices (we love it when this is the case!).

Form-3-A-Determine-Your-Monthly-PPC-Budget-With-Using-Conversion-Rate

Final example! NewApp has determined that their sales team can handle an average of 200 leads per month from their PPC campaigns. They also know from a previous campaign their conversion rate was 10%.

Form-3-B-Determine-Your-Monthly-PPC-Budget-With-Using-Conversion-Rate

This formula has now validated for us that we have realistic goals in terms of cost per lead as well as target lead volume based on our estimated click cost research, as well as our conversion rate estimate.

You may have noticed that’s a lot of estimates – you’re absolutely right. Unless you have past data from campaigns with the exact targeting, seasonality, and more factors, this won’t be an exact science. If it’s your first campaign, play with the numbers in both the short and long ways, and even the cost per lead goal to find a nice comfortable number to start with. As you begin to collect actual data, you can hone in on the number that’s absolutely right for your business, and begin to optimize to improve performance.


 

If you’d like help with any of the above, or just need help optimizing your PPC campaigns, we have a fantastically successful digital advertising team eager to assist in achieving your business goals with paid advertising!

Track Revenue from PPC Leads to Offline Sales

Download Our Guide to PPC ROI

Download our 10-page PDF to learn how to connect the dots between leads generated online and sales converted offline.