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Dozens of companies join AdWords and similar PPC platforms every day. The fact is, most of these folks have zero idea how much money they should be investing in their PPC efforts in order to maximize their RoI. That means that many of them are overspending — and even more are underspending — because they have no concept of what a PPC management budget should look like.
Why a PPC Management Budget (Instead of a PPC Budget)?
Time for some brutal honesty: if you don’t know how to budget for a PPC campaign, there is no way in Helsinki that you should be running a PPC campaign. Period. The advice that follows below could be used to create a PPC budget for an in-house PPC team — but it shouldn’t. Not unless you’re about to hire an in-house team that already knows what they’re doing (and honestly, at that point, most companies are better off outsourcing anyway.)
Step 1: Determine What a Customer is Worth to Your Business
This is some pretty basic math as far as business management goes; you should already have it done. If not, what you need to do is figure out how much money your business gets — net — from its average customer. So (warning: IMMENSELY simplified example coming up) if it costs you $1.35 in advertising, plus $5.70 to create your product, plus $2.15 in customer service after the sale, and you sell the product for $21.99, you make a net profit of (22-2.15-5.7-1.35=) $12.80 per customer acquired.
Step 2: Determine Your Website’s Conversion Rate
This is simple: divide the number of sales you get from your website per month by the number of visitors you have that month. If you get 200 visits and sell 4 products, you have a conversion rate of 2%. That’s really low, and you should invest on improving it, but we’ll run with it for now.
Step 3: Determine a Reasonable RoI
To a degree, in any business, the RoI you want on any advertising campaign is “as high as possible,” but in the real world, there are obviously complications that keep “infinity, please,” from being a legitimate request. Let’s you’re going to be greedy and try to obtain a 100% RoI.
The Final Math
The final math goes like this: If you want a 100% RoI, that means that every customer has to cost you 50% of their value. So if each customer is worth $12.80, you want to spend half that — $6.40 — per customer. BUT! PPC happens on the other side of your website, so you also have to apply your website’s conversion rate — so you can afford in this case to spend 2% of that $6.40, or $0.125, per lead obtained.
Now, you just have to find a PPC management company who will agree to a plan that involves numbers that small, and you’re golden. (Did we mention raising that conversion rate? If you double the conversion rate, you double the effectiveness of your PPC budget. That might be worth a bit of investment up front.)