How To Calculate The Right PPC Budget For Your Business

PPC doesn’t follow the rules other types of advertising have in place.

See, in every medium I can think of, you spend a fixed amount of money to get a defined number of deliverables. Those deliverables are used to impact people – your potential customer base. Through a gradual process, that interaction turns them into customers. You can read more about conversion optimization and calls to action here at ppc management company.

Radio, TV, Print, even SEO conforms to this. Not PPC though. With PPC, your budget can be as big or as small as you want it to be, at any time.

This dynamism makes for extreme scalability. You can build out a campaign and optimize it to profitability, then let loose and grow your business at will!

Google advocates a “sustainable, profitable, successful” approach to PPC that I find perfect for this medium.

How do you start, though? What budget do you need to begin? To determine this, there are four items that you must look at.

When building a budget for paid search, look at your acceptable cost of sale, desired return on your advertising spend, current funnel metrics, and the amount of reach available.

Acceptable Costs

 

Everything has an acceptable cost. Economically, there is a tipping point where the amount of money you spend for something doesn’t stack up to the utility you gain from having it.

I call this the “Isn’t Worth It” point. Advertising, specifically PPC, is no different. It needs to be below the “Isn’t Worth It” point in order for it to make sense to continue.

For some companies, this is the break even point. This is where all of your revenue is eaten up by acquiring the customer and providing the product or service.

Many startups and small businesses, eager to get as much market share as quickly as possible, fall into this bracket.

Other companies, with other marketing initiatives and strategic goals, have a different approach. These companies have a threshold of return on investment. Their “Isn’t Worth It” point means that they stand to make more money elsewhere, with other marketing efforts, if this threshold isn’t met. Bigger businesses that are more concerned with maintaining the market share that they have fall within this category.

No matter where your “Isn’t Worth It” point is, this goal is the lower bound for PPC. If it is not happening by the end of your contract with a PPC service provider, it’s probably worth looking at either going with someone else, or dropping it entirely.

Desired ROAS

 

Who wants more money for less? This is sort of a trick statement. You want the highest Return On Advertising Spend you can possibly get, right? Everyone in their right mind is trying to figure out a way to make their margins better.

Desired ROAS isn’t a pie in the sky ideal, though. It needs to be an achievable, concrete goal. How else do you measure the success of a marketing initiative?

In the same way that you have an “Isn’t Worth It” point, you have a “This Is Totally Worth It” point – one that says that if we get to this point, we need to invest more. Sometimes, the “Isn’t Worth It” point and “Totally Worth It” points are a cent apart.

It all depends on what your end goals are. Meeting an ROAS goal means that you’ve got an avenue for growth that is worth allocating more revenue to.

Making sense of all of this

Now that you’ve got your acceptable cost of sale, desired ROAS, probable reach, and current funnel metrics laid out, the only real question you need to ask is how much additional revenue you can sustain at your company’s current position.

From there, you can reverse engineer your PPC budget easily. Let’s walk through an example:

Acceptable Cost of Acquisition: $10
Average revenue per sale: $40
Desired ROAS: 500%
5% Click to sale conversion rate
Desired additional revenue: $100000/month
Reach: 10 million searches/month

Budget=(Revenue / revenue per sale) x acceptable cost of sale =(100000/40) x 10 = $25000/month spend.

There you go. Now for the realism test:
100000/40=2500 sales/month. (2500 sales/month)/5% visit to sale rate= 50000 clicks needed.
In this case, the average CPC for this campaign needs to hit 50 cents a click in order to get below the acceptable cost of sale and make the revenue goals.

If your industry average cost per click is lower than that, great! You’ve got yourself a budget. If not, look into the following:

  • Is there any volume of searches for higher end products/services? If so, you can focus on those specific keywords for your campaign.
  • Is your acceptable cost of acquisition the absolute maximum you are willing to sustain? If not, adjust it.
  • If the above two don’t work, you’ll need to invest in some conversion rate optimization to bring down the number of clicks needed to get below your cost of acquisition.

Hope this helps answer some questions on finding your PPC budget. Have questions? Feel free to run them by me in the comments section or email us for a free consultation!