One of the most common advertising-related questions you can hear is:
“How do I calculate my PPC budget?”
Founders have no idea. Marketers have no idea. Heck, even advertisers struggle with calculating it before they’ve set up the campaign!
However, guesstimates won’t do.
When you’re calculating your PPC budget, you’re actually calculating the value of your customers.
And that’s why we’ve prepared this article. We’ll show you everything you need to know about defining your advertising budget.
Let’s dive in!
PPC budgets should always be calculated for your own campaign.
Every company’s campaign is different, mainly because PPC costs vary from industry to industry. A real estate agent’s PPC budget will be wildly different from a SaaS founder’s budget.
Typically, when we talk about PPC, we talk about paying for clicks on your ads.
This is a much better option as you’re paying for results – not just people who skimmed your ad and never clicked through.
However, costs depend on the platform, as well. The most popular PPC platform is Google Ads, although even Facebook and Twitter offer PPC options.
For example, let’s say you sell email marketing software.
You’ve decided to bid on the keyword “email marketing software.”
If you pour a decent budget into it, your advertisement might show up on the very top part of the Google results page where eyes will see it first.
But the trick of PPC advertising budget calculation is in minimizing the costs, and not spending more than you need.
It’s both an art and a science.
Before we get started, you should understand the difference between initial transaction value and the lifetime value of the customer you’ll attract with your ad.
For example, your ad may generate an initial $5 transaction.
However, if the LTV of the customer turns out to be $5000, then it makes sense to pay $1 for a single click.
Conversely, if you can’t raise the LTV of your customer to more than those $5, spending $1 may be a lot.
If you’re in the SaaS space, which has a shelf life that continues on and on, rather than just existing as a one-time blip in your revenue, you should take LTV into consideration when deciding on your PPC advertising budget.
Now that’s out of the way, grab your calculator. We’re going in!
You can’t calculate a budget without knowing why you’re advertising.
If you set up specific goals with a timeline, you’ll be able to calculate your PPC budget more accurately.
You can use the SMART goal-setting methodology. Each goal should be:
Usually, companies want to achieve a few goals with their PPC advertising:
For example, you may be a small SaaS that wants to break even with old, discounted email software subscriptions before launching a new product.
In order to do so, you’ll need to get at least 100 customers to purchase that old software within 2 weeks of the new product launch.
When you frame it with the SMART method, your goal would be:
Get 100 new customers to purchase old product through PPC advertising over the next fourteen days.
The more specific your goal is, the better.
Vague goals just won’t do, and they’ll make calculating an accurate budget nearly impossible.
AKA: Understand what you’ll need to do to get the traffic you want.
You’re going to need to be honest with yourself about the realistic conversion figures that you could pull in within two weeks – based on your business history.
Take a look at your historical Google Analytics data.
If you’ve run PPC ad campaigns in the past, take a look at the conversion rates.
Once you’ve got them, calculate the traffic with the following formula:
New customers needed / Conversion rate
If we go back to our previous example where we need 100 customers and our conversion rate is between 2% and 4%, our calculation would look something like this:
When we sum it up, our SaaS example is going to need to drive from 2,500 to 5,000 shop visitors over two weeks to reach the established PPC goal.
Now that you know the total number of clicks you need to achieve your goal, it’s time to calculate the cost of each click (CPC).
You have three options:
You’ll find average CPC (cost per click) data in your PPC account – if you’ve run similar ads in the past.
If not, you can use Google Keyword Planner to calculate the cost of each click:
You’re probably realizing that CPC is incredibly hard to calculate unless you’ve uploaded all the campaign specifics.
Your cost depends on a variety of factors, including ad quality and competition at the time of launching.
However, maximum and average CPC values will help you calculate the cost of each click to your site.
If we use our good old example, our maximum cost per click could range from $2.50 to $3.00
So far, you’ve got the following variables:
This is everything you need to calculate your budget with the following formula:
Total PPC Budget
Traffic needed x Average cost per click
Calculate it twice, to estimate the high and low ranges of your budget:
In our case, our calculations would look something like this:
5,000 visitors x $3.00 average cost per click
2,500 visitors x $2.50 average cost per click
Our SaaS example’s PPC advertising budget could range from $6,250 to $15,000 for the next two weeks.
Okay, the basic stuff is done. It’s time to calculate if your advertising campaign is profitable.
Again, keep the ITV (initial transaction value) and LTV (lifetime value) in mind.
Paying $6,250 for an advertising campaign is not a lot – if your customers are going to bring you $62,250 in the long run.
The most accurate way to forecast your return on ad spending (ROAS) is by understanding the value of your customer and your average order value.
You can get your average order value from your historical data. How much do customers spend with you on average?
You can calculate it both for ITV (initial transaction value) and LTV (lifetime value) to understand how you’ll profit in the short term, and how you’ll profit in the long term as the lifetime value of your customers’ increases.
Then, to get the true average figure, divide them.
Again, it’s best to have historical data that you can rely on.
Finally, you’re going to need two formulas to calculate your ROAS:
Average Order Value x New Customers
Let’s say that our average order value is $600.
Our expected revenue calculation would look something like this:
Expected Revenue = Average Order Value x New Customers
Expected Revenue = $600 x 100
Expected Revenue = $60,000
In total, we could expect $60,000 from the advertising campaign that could cost us between $6 and $15k.
Now, we’re going to put things into perspective by calculating the ROAS:
(Revenue – Ad Spend) / Ad Spend
You’re going to calculate it twice; for the low ad spend of $6,250, and for the high ad spend of $15,000.
Our calculations would look something like this:
Low ROAS = ($60,000 – $15,000) / $15,000
High ROAS = ($60,000 – $6,250) / $6,250
Our ROAS would be between 300% and 860% based on the information provided.
I know that we’ve just shared a tonne of different calculations and formulas with you and if you’re anything like me you’ll forget them in an instant if you don’t save them.
For that reason, we’ve put together this quick cheat sheet which you can also download as a PDF:
And there you have it!
While calculating PPC budgets may seem like a daunting task, it’s not. It’s all about the numbers you can get from your advertising campaign.
However, keep those numbers and goals at the forefront of your mind.
When you calculate them on the fly with these formulas, you’ll be able to confidently decide whether your budget works or doesn’t work.
And when you’re ready to launch, don’t forget to take a peek at the cheat sheet!
Are you ready to calculate your PPC budget and finally get that advertising campaign up and running?
If the answer is yes and you want to work together, click the button below.