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Good! So you are running or you know that you need to run PPC advertising, but how much should you spend on your Google Ad Campaigns? While it might seem like there is an overwhelming number of variables that could go wrong, too little time to build a successful ad campaign, and not enough money to test all of the individual pieces, there is a tried and true formula to determine how much you should be investing into your Google Ads. Here are the 4 steps to finding an ad budget that will work for you:
Now let’s get started.
In order to get started we need to establish a couple specific advertising metrics and collect some data. You will be able to find these metrics inside Google Ads, your landing page or website, and a couple you will need to calculate from your own profit margins. As you find these metrics write them down because we will need them later.
The first metric we are going to be looking at can be found in either your own ad campaign or inside Google Keyword Planner. If you currently running Google Ads all you need to do is look at your average cost-per-click (CPC). This is the amount that you have to spend to get someone to click on your ad and is the first ad metric in our formula. You can use the previous month’s average as a conservative estimate of your CPC. If you are not running any Google Ads you can still estimate your CPC using data that Google has collected using this free tool, Google Keywords Planner. Once you log in you can look up the keyword phrases you plan to bid on, and average the CPC’s of all the keywords you plan to use. This CPC estimate can be used to accurately estimate how much you will have to pay for clicks once you get your campaign up and running. If your CPC is looking a little expensive, don’t worry. Use these 11 tips to get more people to click on your ads for less.
The next metric we need to find is the conversion rate on your landing page or website. This process is easy if you are already running an advertising campaign or have large amounts of traffic to your website. If you are looking to generate leads there will be an additional step in this process which we will revisit later. You can find your conversion rate by first looking at the number of people who take action on your website and secondly, dividing that number by the total number of visitors on your site. If you are selling a product, the conversions are the number of people who purchase, and if you are generating leads this is the number of visitors who submit their information. For example, if there were 100 people who visited your site in the last month and 20 of those people purchased your product, then your conversion rate would be 20%. Both the number of conversions and the total number of website visitors should be available in just about any analytics suite. If you are just starting out or don’t have any of your website data, you can estimate a conservative conversion rate between 1-5%. Want to see how your conversion rate stacks up to the competition? Take a look to see what our friends at Unbounce say about your conversion rate.
Now that you have your CPC and your conversion rate, there is just a few steps left. We need to determine how much money you make on average per lead or sale. In order to calculate this number you need to consider the lifetime value of your customers. This means that you need to figure how many times you transact with your customers or clients on average, and how much you make from these transactions on average.
This is where things get a bit more complicated if you are generating leads online. In order to figure out how much money you make from an average lead you need to determine how many of your lead actually end up doing business with you. So for example, if you generate 10 leads every month and 7 of those leads actually end up doing business with you you would have a 70% close rate, and if every customer that you end up doing business with pays you $150 for your first service and on average come back for 2 more services (assuming you charge the same price for the additional services) the total lifetime value would be $450.
If you are selling a product online that people buy directly, you don’t have to worry about a close rate because all of your conversion have already purchased. In this case all you have to do to find the customer lifetime value is figure out how much on average, each of your customers spend on your products over the lifetime of their interaction with you.
That’s it, that’s all the data you need in order to find out exactly how much you should be spending on Google Ads every month. That means it’s time for step 2, finding your break even point.
In order to find how profitable your ad campaign will be, you just need to evaluate the profitability of your advertising which means you need to determine how much money you need to spend to get your first customer and compare that cost to the profit you make from each customer. Here’s a hypothetical set of data that we can use for the sake of demonstration:
Average CPC – $16.54
Landing Page Conversion Rate – 10%
Close Rate – 50%
Customer Lifetime Value – $450
In order to determine whether your campaign will be profitable or not, you need to figure out the cost of getting someone to do business with you and compare this with the amount of profit generated by their interaction. Using the numbers from the example above we need to get 20 people to your website to generate 2 leads in order to close 1 paid customer. So the cost to get 1 person to do business with you is 20 x $16.54 = $330 and if you generate $450 from each customer, you make $120 ($450-$330) for every $330 you spend.
In this example you now know that your break even point is going to be $330 since this is the point where you go from a negative return on your investment to a positive return on investment. This $330 is also the minimum ad budget you should spend every single month, but the beauty of this paid advertising system is that it scales linearly. So you can continue to make to make money as you continue to scale your advertising budget, however, there is a limit to how much you can spend. In the next step I will show you how you can find your advertising ceiling.
When advertising on Google, you are showing your ads to people who are actively searching for your keyword phrases. Which means that there is a finite number of searches per day that you can appear on. The more you broaden your keyword phrases the more searches you can appear on, however in general, the more broad your keywords the lower your overall click through rates will be. Typically it is good to have a rather specific campaign that targets your ideal audiences with keywords that show high buyer intent. Once your keywords are in place you can begin to test how much you can spend per day on clicks. The best way to do this is to begin testing different daily budgets. So instead of spending your month long budget evenly over 30 days, start to spend larger amounts each day. If you spend $20 on your first day and Google spends all of your budget then try to bump your daily budget to $40 or more until Google can no longer spend all of your budget each day. At that point you are maximizing your impressions inside your target audience on your specific keywords and you can readjust your future advertising budget to match the ceilings you set.
In certain niches you can run into budget problems if your keywords have too low of search volume everyday, or if your keywords have so many searches that you can’t afford to keep increasing your daily budget. The solution here is your keywords. If you aren’t getting visitors to your site and Google can’t seem to spend all of your budget, consider expanding to more broad keywords with higher search volumes. These keywords will most likely have slightly higher CPC’s but it could be well worth the price if they help you get more traffic and conversions on your site.
On the other hand, if you can’t seem to find a ceiling and can’t afford to continue increasing your ad budget, you have two options. If you are getting a good amount of conversion on your site, you can just choose how much you are willing to spend every day and let your ads run as is or if you want to try to get more conversions from your ads, you can try to narrow your keywords so you aren’t bidding on keywords that have high search volume and CPC’s. If you are a business that targets local markets here are some ideas you can use to narrow your campaign and get in front of local audiences.
This is the best part of the process. Once you have found your break even point, set up profitable ads, and found your maximum ceiling you can sit back and watch as qualified leads start to flood in. While there are always small changes and optimizations you can find (here are some quick tricks you can use to optimize your Google Ad campaigns today), you now have a profitable campaign that can help drive consistent leads to your business. Be careful, just because you know you can get more leads quickly, doesn’t always mean you should. Make sure that you are prepared for the influx of new customers and have systems in place that will help you handle this new lead source.
Thanks for reading and happy advertising!
Tim Grooms
executive director
Tim once at nachos from Tres Hermanas for a month straight. Don’t believe us? We have proof.
Leading the charge for PPC and conversion rate optimization, Tim spends most of his time with clients and in the trenches fighting for better return on investments.
When he’s not making clients money, he can be found in the gym or the nearest coffee shop.
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