So How Much Should I Be Spending on Pay Per Click Advertising?
Pay per click advertising, or PPC, is a pricing method of paid advertising, best known for using search engines to distribute ads alongside “organic” search results. Businesses pay a specified amount for each click that an ad receives, instead of paying per “impression”. Search Engine Optimization, or SEO, on the other hand, is the process of naturally raising your ranking on the results page using a combination of organic factors, some of which are links and content.
While optimizing your SEO will help significantly raise your ranking, it is also crucial for many businesses to market its services or products using PPC. In contrast to SEO, pay per click advertising plans are directly measurable, scalable, and fast paced.
For beginners in the PPC world, however, it can be difficult to determine how much you should be spending on a monthly basis — or whether you should be using it at all. That’s why I’ve put together this quick guide on calculating a reasonable budget for PPC marketing.
I designed this guide to use with Google Adwords, simply because their advertising platform happens to own a 70% market share in the United States. Bing’s Adcenter, which is less competitive, is usually a little cheaper.
Follow these quick steps to find out if PPC advertising is right for your business, and how much you should be spending on it to generate a profitable return:
Step 1: Google it
Your first job is to research the keywords that relate to your business, product, or services. This will help you understand which search queries and keywords are used to find your business offerings, as well as show you how much your competitors are spending on Adwords.
One free way to do this is use Google’s Adwords Traffic Estimator. Type in the keywords you’ve collected and your location settings, and then enter a “Max CPC” — or maximum cost per click. This is the amount of money you are willing to spend per click. For now, set this where the average CPC falls, somewhere between $1.50 and $3.00. Once you submit this information, the Traffic Estimator will generate an average CPC for your business’s keywords, according to Google’s estimates.
Step 2: Gather Information about Your Current Website
Next, you’ll need to find out your website’s conversion rate — that’s the percentage of total visitors you receive that perform an action that your business considers valuable. Whether it’s signing up for a mailing list, making an initial purchase, or filling out a contact form, the users who take an important step towards purchasing are your “leads.”
Then, you’ll want to know your average closing rate from leads — this is the percentage of the users mentioned above who actually make a purchase from your business.
Step 3: Calculate your Budget
Say, the Traffic Estimator projects an average CPC of $3 for your keywords. Your website conversion rate measures at 10%, and your average closing rate from leads is 20%.
That means that one in ten clicks will become a lead (again, meaning the visitors of your website will do something your business considers valuable). With each click priced at $3, the “lead” will cost $30 (since you will have to pay for 10 clicks). Of those leads, 20% become actual customers, giving you a $150 cost per acquiring a new customer. These are fairly impressive numbers, so don’t worry if yours aren’t as high. The final extremely important metric to consider is the Customer Lifetime Value (CLV).
Imagine your business has three locations, each with a goal of acquiring 10 new customers a month. With a lead conversion rate of 20%, you’ll want a total of 50 leads per location (20% of 50 is 10).
Keeping with the $30 cost per lead, 50 leads equals $1500 per location per month. That means for your three locations, you would want to spend ($1500×3) $4,500 per month on PPC advertising, to obtain a total of about 30 closed sales per month, achieving your goal.
Is PPC right for my business?
Use this budget-calculating guide to see if PPC would be a profitable investment for your business. In the above case, for example, let’s say that each closed sale is worth $10,000. With 30 closed sales, that would be $300,000 in total revenue from an investment of $4,500.
However, if each of your closed sales only brings in an average of $10, then your revenue would be $300 for that same $4,500 spent on PPC ads.
Of course, disparities like that may be hard to find in Google Adwords, as the average CPC prices typically reflect the cost per sale in a given industry. Finding the right keywords, based on the costs per click and conversion rates, can be a challenge. However, the difference shows you that depending on your website’s effectiveness, the average CPC prices on your keywords, your average closing rate on leads and the average value per sale, the return of investment on PPC advertising can be extremely profitable.
Tips for Maximizing the Effectiveness of Your PPC Ads
As you can see from Step 3, one of the major determining factors of your PPC budget is your website’s conversion rate, i.e., the performance of your website. The better it is in terms of relevancy, content, shareability, etc., the higher your conversion rate will be. One of the most effective ways of raising PPC efficiency is to create a website that is interesting, persuasive and relevant. Content is one way to achieve it. Good copy will convince readers to buy by building trust and highlighting the benefits of your business. In addition, you should always have a clear Call to Action so that potential customers know exactly what to do when they want to purchase.
Usability is another factor that can help raise your conversion rate. The easier and more intuitive a website is for customers to use, the more they will trust your brand: they will come to associate your brand with comfort. Try visiting Apple’s website, for example. With a glance at the landing page, you can quickly grasp how to navigate and find the content you are looking for– usually within just a couple of clicks. A good user experience will also help raise your ranking organically on the Search Engine Results Page.
PPC advertising isn’t necessarily for everyone. But, if you’ve been on the brink– trying to decide whether or not you should be using PPC, but you haven’t been able to figure out how much it would cost you and how much you could stand to make from it — hopefully this guide has helped. For businesses with high lifetime customer values (doctors, dentists), high profit margins (lawyers, auto sales), or very diverse offerings (shopping sites like Amazon, eBay), PPC has become practically a necessity — not only because of the high revenue per closed sale, but also because if you are not using PPC, your competitors probably are.
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About Alexander Kesler
With over 14 years of successfully building companies, including building his first company at the age of 22, Alexander is an experienced entrepreneur with hands-on traditional and digital marketing experience in several diverse industries. Alexander has consistently leveraged his background in technology development and sales to inform and influence his marketing decisions. As a digital…