Updated on October 8, 2020, to include new information and insights.
“What Should My PPC Budget Be?”
This is a question that we get asked a lot by businesses for a few reasons. Either they are just getting started with pay-per-click advertising for the first time, launching a new aspect of their PPC strategy, or simply reevaluating their approach to ensure they are investing correctly.
Depending on how advanced you are with tools like Google’s Keyword Planner, Google Analytics, and digital marketing in general, the short answer may be:
- Define your SMART business goals for PPC
- Evaluate past performance using a simple framework like our Click-Worth Calculator
- Determine your profitability requirements
But let’s take a deeper look at what that means, and review some of the fundamentals that should be informing the “right” budget for your business. That said, we aren’t going to spend much time talking about how to improve profitability here. But if your interest is piqued, our Building Successful PPC blog series is a good place to start.
“Am I spending too much? Not enough? Am I spending on the right platforms and in the right places? How do I know if our spending falls in line with our goals?”
What a company spends on paid advertising shouldn’t be a static number. Budgets change. Goals change. Spending changes. There isn’t a right answer. However, there can (and should) be a method behind the madness.
Let’s walk through a framework that can help shed some light on the budget question the next time it comes up for you.
Keep in mind:
- There is no absolute right answer to the PPC budget question.
- When making your PPC budgets, use ranges to hedge for error.
- Use data from estimate tools as a guideline—not the rule.
Start With Your Goals
Before we get to the dollars and cents on how much you should spend, it’s vital to define what you’re spending for. Setting actionable, quantitative goals with a timeline for your PPC spend is a must.
If a stated goal feels vague or unattainable to you, it probably is. Use a SMART framework (Specific, Measurable, Achievable, Relevant, Time-bound) to get this off the ground.
Interested in acquiring new customers? All of the customers in your market? Or can you only service a set number of new customers at one time? Does it matter how much you pay for each new customer? Is your inventory depreciating quickly (e.g., retail), so that conversions now are worth more than conversions in three months?
Determining goals for your PPC spending can go many different ways. Let’s take a look at common goals for companies engaging in paid advertising online:
- ROI-focused lead generation or customer acquisition: “We want to acquire 100 new customers within the next 30 days paying no more than $50 per new customer.”
- Absolute lead generation or customer acquisition growth: “We want to acquire 100 new customers within the next 30 days regardless of the cost per new customer.”
- Brand awareness: “We want to show 5 million impressions to potential customers over the next 30 days.”
As a working example through this post, we’ll use The Ski Shop–a fictional e-commerce store looking to unload their outdated ski boot inventory before their new product line comes in for the upcoming season.
Using paid advertising as one source of traffic during an upcoming clearance sale, the team at The Ski Shop has determined that they need to acquire 200 new boot customers within the next 30 days before their new inventory hits the store. For simplicity, we’ll assume that they absolutely must have all merchandise gone, to avoid getting into more complicated minimum-margin calculations here.
The Ski Shop’s goal: drive 200 new customers via paid advertising regardless of cost over the next 30 days.
Determine Traffic Generation Requirements
Once you have your definable, quantitative goal with a timeline attached to it, we can move onto the next step of the budgeting process: traffic generation requirements.
Based on your goal, how much traffic do you need to drive to reach that goal within your specified timeline?
Instead of guessing, use any historical data from your analytics platform to educate your estimations.
If you have a full business cycle worth of historical PPC conversion figures, that’s your ideal place to start. If you’ve never done PPC before, are launching a new strategy with different expected conversion rates, or you haven’t been running for long enough to map out any significant seasonal changes, use your website’s overall conversion rate to get an idea of how often people are converting.
Important: if you do use overall website conversion rates to approximate at this point, bear in mind you may be reaching people at different stages of the buyer’s journey with paid traffic than you are with organic or direct traffic.
Here’s the first place where using a range of conversion rates will help cut your margin for error.
Once you have a conversion rate range that the data supports, use the formula below to generate your traffic requirement numbers:
traffic required to meet your goal = customers needed / conversion rate
Looking at The Ski Shop, traditionally, visitors entering the site through a paid advertisement convert 2.25% of the time. Based on that figure, our conversion rate range will be 2% – 2.5%. Let’s see how much traffic The Ski Shop will have to drive based on our conversion rate range to generate 200 new customers.
Low conversion rate:
traffic required to meet your goal = 200 customers / 2%
traffic required to meet your goal = 10,000
High conversion rate:
traffic required to meet your goal = 200 customers / 2.5%
traffic required to meet your goal = 8,000
The Ski Shop’s traffic requirements: based on The Ski Shop’s goal of 200 new customers and the expected conversion rate range we created after reviewing historical data, The Ski Shop will need to drive between 8,000 and 10,000 visitors over the next 30 days to reach their target.
Research CPC Cost Estimates
Now that we understand how much traffic we need to drive to reach our goal, let’s turn to the money.
Get an understanding of what you will need to pay per click for the traffic required. Again, similar to conversion rate, use a range when estimating your CPC.
There are two great places to gather information for CPC estimates:
- Historical data. If you have historical data from past efforts, that will always be the best place to start. Competition and CPCs are ever-changing, but those historical numbers will typically give you a good ballpark idea of what you should expect to pay.
- Your current PPC efforts in your account. If you’ve never run PPC campaigns before, or your new goals are sending you in a different direction from the historical spending in your account, Google’s Keyword Planner is another place to find CPC estimates.
To find the Keyword Planner, log into your Google Ads account, click the “Tools” tab in the top navigation, then click “Keyword Planner.”
Remember, this tool provides estimates for search volume and costs. There are many factors, like Quality Score, that will affect your Actual CPCs. That said, this is still a good place to look if you are starting from scratch and trying to understand competitiveness around specific keywords.
For The Ski Shop, here’s a look at what the Keyword Planner tells us about estimated CPCs based on the keywords they will be targeting:
The Ski Shop’s average cost per click: based on the estimates found in the Keyword Planner, The Ski Shop should set its estimated CPC range from $0.40 – $0.85.
Tying It All Together
Now that you have determined your goals, how much traffic you need to reach those goals, and the cost of that traffic, setting a budget becomes easy.
Using your traffic and average CPC estimate ranges, we can build our budget with the formula below:
traffic required X average CPC = total budget
Use that formula twice to estimate the high and low ranges:
highest traffic required X highest average CPC = highest total budget
lowest traffic required X lowest average CPC = lowest total budget
Let’s look at how this formula translates to The Ski Shop based on we’ve put together so far:
10,000 visitors X $0.85 average cost per click = $8,500
8,000 visitors X $0.40 average cost per click = $3,200
The Ski Shop’s budget range: based on our advertising goals (acquire 200 customers), traffic requirements (8,000 – 10,000 visitors), and average CPC estimates ($0.40 – $0.85), we can set The Ski Shop’s paid online advertising budget between $3,200 and $8,500 for the next 30 days.
Taking One More Step to Profitability
While working through this example with The Ski Shop, something that we did not take into account was profitability.
Understanding the value of a customer, or an average purchase value, will allow you to determine your return on ad spend (ROAS). Let’s see how with The Ski Shop, assuming their average purchase value is $250:
Expected Revenue = Average Purchase Value x New Customers Goal
Expected Revenue = $250 x 200
Expected Revenue = $50,000
ROAS = (Revenue – Ad Spend) / Ad Spend
ROAS = ($50,000 – $8,500) / $8,500
ROAS = 488%
ROAS = ($50,000 – $3,200) / $3,200
Put simply, a 488% ROAS on the low end means that for every dollar spent on advertising, $4.88 in revenue is generated. On the high end, a 1,460% ROAS represents $14.60 in revenue for every ad dollar spent.
Using The Ski Shop example, we had to move inventory regardless of cost. However, that’s not always the case. If you’ve got a handle on contribution margin (your overall margin per unit), ROAS becomes an even more useful tool to guide how much you can spend and still grow revenue profitably.
Setting yourself up with the ability to track these KPIs and goals is crucial. Throughout every phase of your PPC effort (planning, execution, evaluation, and refinement), keep your KPIs front and center; they should help drive every decision made throughout the process.
When working through these steps, focus on using the resources already available to you. Whether that’s historical PPC campaigns, insights from Google Analytics, or other estimating tools, pulling together meaningful data to aid your decisions will help in a big way. Additionally, creating realistic ranges for goals and likely outcomes will help cut down on unpleasant surprises.