How to set a PPC budget
Chad Kearns Dec 10 2015
“What should my PPC budget be?”
How to set a PPC budget is one of those questions I get asked on an extremely regular basis as we start working with new businesses. So much so that I thought it’d be a good time to put the “quick” answer out for general consumption.
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 S.M.A.R.T. business goals for PPC
- Evaluate past performance using a simple framework like our Click-Worth Calculator
- Determine your profitability requirements
We often hear that it would be useful to get a simple, hypothetical walkthrough of how a PPC Strategist would run through this for a real business. I completely understand that since a company’s budget for advertising online is typically a sizable part of their marketing spend, and can often be reactively grandfathered in. It makes zero difference if that’s coming from inertia-driven annual budgets, a brand new business, or just an under-managed legacy account.
What this means here:
- I’m going to touch on a lot of the fundamentals in this walkthrough.
- We’re not going to spend a lot of time talking about how to improve profitability. But you can absolutely hire an agency to do that kind of audit if you’re looking to get the most out of your SEM dollar.
“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.
That said, let’s walk through a framework that can help shed some light on the budget question next time it comes up for you.
Before we dive in too far, a couple of points to touch on:
- 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.
Whether you’re planning for your next advertising initiative, 2016’s annual budget, or just looking at what to spend next, we’ll use a four-step framework to answer your biggest budget questions.
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 S.M.A.R.T. or SMART framework to get this off the ground. Specific, Measurable, Achievable, Relevant, Time-bound.
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 3 months?
Determining goals for your PPC spending can go a lot of different ways. Let’s take a look at common goals for companies engaging in paid advertising online:
- ROI-focused lead generation or customer acquisition
e.g. ‘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
e.g. ‘We want to acquire 100 new customers within the next 30 days regardless of the cost per new customer.’
- Brand awareness
e.g. ‘We want to show 5 million impressions to potential customers over the next 30 days.’
As a working example through this post, let’s look at The Ski Shop – a fictional e-commerce store that is 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 inventory 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 (remember S.M.A.R.T.!), 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 in order to reach that goal within your specified timeline?
Instead of guessing, use any historical data that’s available to decrease your margin for error.
One of the most obvious but still most effective places for historical data is Google Analytics (or the analytics tracking platform implemented on your site). Bottom line, take a brutally honest look at historical conversion figures to get an idea for how traffic will likely convert on your site.
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, or you haven’t been running for long enough to map out any significant seasonal changes, you can get away with looking at your website’s overall conversion rate to get an idea of how often people convert and become a customer.
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 (PPC) than you did with Organic or Direct traffic. This is a more complicated topic best saved for another post or a conversation.
If your gut tells you that these numbers represent past underperformance, great! Get an audit from a professional. But don’t let this be the moment you ignore historical data and set a goal that sets you up to fail before you start.
Here’s the first place in which using a range of conversion rates will help cut your margin for error.
Once you have a conversion rate range that the data supports and feels real to you, 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 in order to generate 200 new customers.
traffic required to meet your goal = customers needed / conversion rate
traffic required to meet your goal = 200 customers / 2% (low conversion rate)
traffic required to meet your goal = 10,000
traffic required to meet your goal = 200 customers / 2.5% (high conversion rate)
traffic required to meet your goal = 8,000
The Ski Shop’s Traffic Requirement: 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 goal.
Research CPC cost estimates
Now that we have an understanding of how much traffic we need to drive to reach our goal, it’s time to turn our attention to the finances.
What we have to understand next is how much we will need to pay for a click of our ad and a subsequent visit to our website. Again, similar to conversion rate, use a range when estimating cost per click prices to help cut your margin for error.
There are two great places to gather information for cost per click (CPC) estimates.
Again, this may be obvious, but the best place to start is in your current PPC account. Industry benchmarks are great, but respect the fact that your business is sufficiently unique that it’s still your best guide. If you have any historical data, understand what you’ve paid in the past on a CPC basis- competition and CPC rates always are changing, but typically those historical numbers will give you a good ballpark idea of what you should expect to pay. To note, this can be another good place to leverage a professional audit if you’ve been running a set-it-and-forget-it campaign in the past. Your rates may have room for improvement if you clean up waste and focus on more cost-effective PPC tactics.
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, the Google AdWords Keyword Planner is another place to find CPC estimates.
To find the Google AdWords Keyword Planner, log into your AdWords account, click the Tools tab in the top navigation, then click Keyword Planner. There’s a ton of great content already written on this tool, which we won’t repeat here.
When using this tool, please, please, please remember that actual CPCs can end up being quite different than what you may find in the Keyword Planner, and can be affected (both positively and negatively) by Quality Score, device type, geography, and average position, among other factors.
Again, just as before, find a CPC range to hedge for those factors that could either inflate or deflate the actual price you pay per click. You’ll definitely get better at estimating this range the more you do it, but there will always be some degree of variance.
For The Ski Shop, here’s a look at what the AdWords 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 $1.25 – $2.00.
Tying it all together
We’ve worked through setting a S.M.A.R.T. goal, determining how much traffic is required to meet that goal, and finding how much that traffic will cost on a per click basis.
Now, we can tie all of that information together to create a PPC budget that connects back to our original goal.
Using your traffic and average CPC estimate ranges, we can build our budget with the formula below:
traffic required * average CPC = total budget
Use that formula twice to estimate the high and low ranges:
highest traffic required * highest average CPC = highest total budget
lowest traffic required * lowest average CPC = lowest total budget
Let’s look at how this formula translates to The Ski Shop’s based on we’ve put together so far:
10,000 visitors * $2.00 average cost per click = $20,000
8,000 visitors * $1.25 average cost per click = $10,000
The Ski Shop’s budget range: Based on our advertising goals (acquire 200 customers), traffic requirements (8,000 – 10,000 visitors) and average cost per click estimates ($1.25 – $2.00), we can set The Ski Shop’s paid online advertising budget between $10,000 and $20,000 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. Unless, for example, you’re a very well funded start up looking to build those critical early customers at nearly any price, most companies are rightly going to keep very close control on the profitability of their ad spending.
Understanding the value of a customer or average order value will provide you with the ability to determine your return on ad spend (ROAS).
Let’s see how with The Ski Shop:
Average Order Value = $250
New Customers (goal for PPC) = 200
Expected Revenue = Average Order Value * New Customers
Expected Revenue = $250 * 200
Expected Revenue = $50,000
ROAS = (Revenue – Ad Spend) / Ad Spend
Low ROAS = ($50,000 – $20,000) / $20,000
Low-end ROAS = 150%
High ROAS = ($50,000 – $10,000) / $10,000
High-end ROAS: 400%
Put simply, a 150% ROAS on the low end means that for every dollar spent on advertising, $1.50 is generated in revenue. On the high end, a 400% ROAS represents $4.00 in revenue for every ad dollar spent.
Going beyond The Ski Shop example, where we had to move inventory regardless of cost, 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. But without follow through on what the data shows, those tracking abilities are meaningless. 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. Finally, make sure to track your progress along the way.
Whether you’re planning your complete 2016 budget or ramping up for a specific promotional campaign, going through this exercise should produce a budget that’s custom-fit for your unique business and needs.
Vice President of Client Solutions
As the Vice President of Client Solutions, Chad is responsible for helping guide Portent’s service offerings and execution. With Portent since 2012, Chad is passionate about ensuring clients receive top-notch service and results from our team. Outside of Portent, Chad loves to be outside- hiking, playing soccer, skiing, and cheering on his Seattle sports teams. Read More