Every year we're approached by numerous small- to medium- sized businesses (SMB) that are considering PPC advertising. Often we're asked to give an estimate of what budget they should consider.

Since the process isn't complicated, I though I'd share how you can estimate a budget yourself.

For this exercise we'll assume you're going to start with Google AdWords. To get a good estimate, you'll need to answer 4 main questions:

1. What is monthly search volume?

You'll find the best data available for search volume through the Google Keyword Tool. Here is what you'll see when you get there:

Google Keyword Tool

There are two main ways to use this tool. First, in the "Word or phrase" box you can enter keywords that you think your customers will be searching. For this exercise we'll use my dad's grass fed beef as the example. He's a rancher in Idaho and sells his beef directly to consumers in Eastern Idaho and Utah, so we'll type in "idaho grass fed beef" and "utah grass fed beef". The second option would be to put a website directly into the tool and let Google tell you keywords it thinks would be relevant to the site. You can put your own site in or you could put in a competitor or popular blog to see what keywords Google feels are relevant to their site. Here is what you'd get:

Google Keyword Tool Results

The data you're looking for is in the far right column labeled "Local Monthly Searches". For our example this shows Google's estimate on the number of searches in the United States in a given month. But don't leave this page, we'll need it in our next step.

2. What is the estimated CPC of your keywords?

Finding the cost-per-click (CPC) for your desired keywords simply requires that you be logged into Google when using the tool above. If you haven't already, click the Sign In link at the top right of the screen and login. You may have to type your keywords in again, but what you need to do next is click the "Columns" button just above your results on the right side and you'll see the following options:

Google Keyword Tool Columns

Make sure to check "Approximate CPC" and then click "Apply". You'll now have a column on your search results that shows the approximate CPC in addition to competition and monthly searches, like so:

Google Keyword Tool Results

3. What is your current conversion rate?

This data is going to have to come from your site analytics package (Google Analytics, Omniture, WebTrends, Statcounter, etc.) or from your sales team. However you get the information, you need to know how many of your leads/free trials/RFPs turn into a buying customer. This might happen right away for ecommerce sites and it might take months if you have a longer sales cycle. The accuracy of this number is crucial so do your best, even if it's just your intuition.

4. What is the average value of a new customer?

This is closely related to your conversion rate and there are two values you need to consider. The first is the value of the first purchase. Many customers will make a small initial purchase to effectively trial the product. Factoring this into your calculations help you reach break even more quickly. The second consideration is the lifetime value of the customer. Going back to my dad's beef, his customers typically reorder every 2-4 months, so while the first sale is around $90, the lifetime value of a customer is over $500.

Now Do The Math

Now is the easy part. Use the following equation to determine the monthly cost for each of your keywords:

Monthly Search Volume X Average CPC X 3% Click-Through-Rate (CTR)

The 3% CTR is just an estimate. As you improve your ad copy you should try to exceed 5%, but it will vary depending on your industry and offer. I also recommend using Excel to make this a little easier to manage. After you've calculated the cost for your keywords, add them up and you have an estimated budget for AdWords.

Bonus: Will Your PPC Be Profitable?

Now that you have an idea of what this is going to cost, you can run this additional calculation:

Monthly Search Volume X 3% CTR X Conversion Rate X Avg Customer Value

If this number is higher than your calculated spend you'll be printing money.

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