Many businesses struggle to define a proper PPC budget. Most often budgets are just pulled out of “thin air.” This article will give you a simple strategy for creating a pay-per-click budget to run on Google AdWords.
Define Your Goals
Clearly defining goals is KEY. I’m sure that no one is interested in spending advertising dollars for fun. Clear goals will help you make smarter decisions once your pay per click advertising campaigns are running.
Here are a few key questions to ask yourself:
- What is the lifetime value of each customer you gain?
- How many customers do you hope to acquire and in what time-frame?
- Is there a limit to your marketing budget?
- Are you committed to making ppc advertising a staple of your overall marketing strategy or is this just a small test?
Once these questions are answered you can start to create a budget.
Two key components that determine the success of a ppc marketing campaign is your CPC ("cost per click") and Conversion Rate.
Research Average CPCs for Your Industry
First thing is first, let’s find out how much you will have to pay each time a user clicks on your ads.
Use a Keyword Tool
The easiest way get an idea of your pay per click costs is to use a keyword tool. I recommend SpyFu.com but you can also choose from many other tools throughout the Internet.
Approximate Your Conversion Rate
Conversion rates are arguably the most important part of the entire campaign. A slight change in conversion rate can mean the difference between failure and amazing success.
Below is a basic list of average conversion rates (for a sale, not a lead).
Under 1% = Bad Conversion Rate
Less than 1 out of every 100 visitors becomes a client
1% - 3% = Average Conversion Rate
1 to 3 out of every 100 visitors becomes a client
3% - 10% = Above Average Conversion Rate
3 to 10 out of every 100 visitors becomes a client
Over 10% = Where Every Business Should Strive To Be
More than 10 out of every 100 visitors becomes a client
Note: conversion rates can vary dramatically between industries and depend on the value your website and product and/or service provided vs. the competition.
Do the Math
Let’s say that you sell a neck pillow for travelers through your online e-commerce store. You went through the steps outlined in this article and found the following:
- Your goal is to gain an additional 250 customers each month.
- The average customer is worth $40 in profit for your business.
- Your profit on 250 customers would be $10,000.
- Average CPCs for keywords in your industry are between $0.50 and $1.50.
- You know that the average conversion rate for your website is 2%.
Use the Information to Determine a Simple Budget Range
In order to gain 250 additional customers at a 2% conversion rate you must get 12,500 visitors to your website. At your low and high average CPCs ($0.50 and $1.50) your budget would need to be between $6,250 and $18,750.
Review Your Findings
In this case you can see that the possibility for large profits with the calculations we made is low. You would have to bank on getting CPCs in the low range of the averages to make any kind of profit and that is not a good strategy.
This is where your conversion rate plays a HUGE role. Simply raising the conversion rate from 2% to 3% (which is still in the average range) would add an additional $5,000 in profit for this campaign.
Make Adjustments
Sometimes the numbers just don't work out in your favor. When this happens you must be able to adjust and attack a problem from a different direction.
As I noted above, a small change in the conversion rate could dramatically increase the effectiveness of this campaign. Increasing your conversion rate is called Conversion Rate Optimization. Here is an article I recently wrote about conversion optimization titled “Focus On Conversions, Not Just More Traffic.”
Another option would be focusing on a different advertising source or choosing more niche keywords that have a lower average CPC.
Note: conversion rates and CPCs can change dramatically from keyword to keyword. This article only serves as a guide to create a simple pay per click advertising budget. Make sure you tailor the numbers to fit your industry.
