How to Calculate your PPC Budget
Warning — there’s math.
Okay, bad news over. On to the good news …
Pay-per-click ads are a godsend to businesses of any size. They are an affordable, scalable way to test messages, test digital experiences, and scale KPIs like traffic, leads, and revenue. Best of all, you only pay if your audience clicks! (Hence, the name.)
That being said, PPC ads on platforms like Google, Amazon, or Bing will eat your money if you let them. So you have to be strategic when you set your PPC budget.
So how do you go about setting a PPC budget for optimal success?
Your First PPC Budget
Unfortunately, your first PPC budget is best defined as “whatever money you won’t miss.” Or “whatever money you can afford to light on fire.”
You shouldn’t expect much early ROI from your very first PPC expenditures.
Not a very cheerful answer, I know. But think of it as “R&D.” We will eventually use algebra to calculate our PPC budget. Algebra has variables. To do the math, we need data to plug into those variables.
So another, more productive way to describe your first PPC budget is to spend as little as possible, but enough to get that data.
Variables in the PPC budget equation
So what data points do we need to obtain before we can set that budget? Let’s run down the list:
- Cost Per Click (CPC). We calculate this by running and optimizing test ads. We then look at how many clicks we obtained and then divide the total we spent on the test campaign by that number of clicks. If we spent $1,000 and got 200 clicks, our CPC would be $5 ($1,000 ÷ 200).
- Conversion Rate. How many clicks convert to customers? You may need an intermediate step — conversion of clicks to leads, conversion of leads to customers. Ultimately, though, we want a single percentage that represents the number of customers you can expect to acquire from a given number of clicks.
- Customer Value. How much revenue, on average, does a customer produce? Some companies simply use their average cart value for the first sale, but a better metric (if you know it) is the customer lifetime value (CLV) — the revenue the average customer produces for your brand over the entire course of the customer relationship, including upsells, cross-sells, and repeat business that doesn’t require extra ad spend to produce.
- Target Revenue. This one is easy. How much money do you want to make. Or, more appropriately, how much more volume can you handle?
Now let’s calculate the budget
Now that we have the variables, let’s do the math. Here’s the equation to plug them into:
PPC Budget = [(Target Revenue ÷ Customer Value) ÷ Conversion Rate] x Cost Per Click
How do we get here? Dividing your target revenue by the customer value tells you the number of new customers you need to hit your revenue goal.
To find out how many clicks we need to produce to get that many customers, we divide that number of new customers by the conversion rate.
Now that we know the number of clicks it will take to meet your revenue goals, calculating the budgetary needs of your PPC campaign is simple. Just multiply that number of clicks by the cost per click.
Let’s use some round numbers. Say you want $100,000 more revenue. Each customer is worth $500 to you and you convert 5% of your new leads. We run a test campaign and come up with a $4 cost-per-click (CPC).
[($100,000 ÷ 500) ÷ 5%] x $4 = $16,000
In other words, you need a budget of $16,000 to produce your $100,000 revenue increase.
If I had to pick one variable in that equation that was most important, it would be cost per click. The lower that number, the lower your PPC budgetary needs.
The next most important is the conversion rate. Raise that number, and your PPC budgetary needs drop even more.
Fortunately, improving those metrics is exactly what we for our clients every day. Before you give the PPC platforms some money to eat, book a strategy call with us.
Let us help you get you the most ROI possible out of your ad budget. Even if we don’t end up working together, you’ll leave that call with some game-changing insider tips to optimize your PPC campaigns.