How Much You Should Spend on Pay Per Click Advertising

by Nick Supapol April 2nd, 2013 

A Step-by-Step Guide to Calculating a Profitable AdWords Budget

Now more than ever, companies are turning to online advertising to attract new business. But if you're just starting out, knowing how much to spend can be a little unclear. That is why I have put together this easy guide to help you calculate a PPC budget.

The guide (tailored for Google AdWords), is broken down into 3 sections:

1. Research Tools

2. Numbers You Need to Know

3. Step-by-Step Calculation

Section One: Research Tools

The first thing to do is research keywords that relate to your business offering and determine on average how much it will cost to bring a visitor to your website.

You can find a number of keyword research tools online. Since we're calculating an AdWords budget, start with Google's Keyword Tool.

Once you have a solid list of relevant keywords, use the Google Traffic Estimator to get an idea of how much a click will cost on average.

A quick walkthrough of the Traffic Estimator:

Step 1: Select your location, language and network

Step 2: Enter your keyword(s)

Step 3: Enter your Max CPC (the maximum cost you are willing to pay per click)

Set the Max CPC where the average ad position falls between 1.5 and 3.0.

If you set your average CPC too high, Google could provide an estimate for a click in position 1, which might not be necessary for your business.

Section 2: Numbers You Need to Know

Website conversion rate:

The percentage of visitors to your website who take an action you consider valuable to your business. Popular actions include a visitor signing up for a newsletter, buying something or filling out your Contact Us form.

A Digital Marketing firm can provide insight on this metric if you don't know.

Let's assume 1 out of every 10 visitors to your website fills out the Contact Us form. Your website's conversion rate is 10%. Impressive…must be that great content!!

Average closing rate from leads:

The percentage of leads that turn into a sale.

Let's assume 1 in every 4 leads turns into a sale. Your average closing rate is 25%. Equally as impressive!!

Section 3: Step-by-Step Calculation

Let's assume the Traffic Estimator projected a $5 average CPC.

Cost per visitor (Average CPC): $5

We determined your website converts at 10%.

1 lead / 10 visitors = 10% conversion rate

Since you will still have to pay for the 10 visitors, it will cost $50 per lead.

$5 per visit x 10 visitors = $50 per lead

Let's assume your sales team has the capacity to handle 100 leads per month. Your online advertising budget should be $5,000 per month.

100 leads x $50 per lead = $5,000 budget

Now that you have your budget, plug in your average closing rate and calculate how many leads you could turn into sales.

100 leads @ 25% closing rate = 25 sales

Finally, calculate how much revenue you could make. Let's assume each sale is worth $1,000.

$1,000 x 25 sales = $25,000 in revenue

There you have it, a step-by-step guide to calculating a profitable PPC budget.

Nick Supapol

Nick Supapol is a Paid Search Strategist at Search Engine People, specializing in Travel, Consumer Goods and Financial Services.

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6 Responses to “How Much You Should Spend on Pay Per Click Advertising”

  1. Linda says:

    Thank you for the information. i just tried it last week (and dind't read your post untill today…) and I didn't got it well.

    I want to ask you a question; Lets say I want to sell a product for €27,-, but the cpc (average) is around the €2,00, for the best keywords, how do I do this? Or do I have to find another way to get the visitors? because when it will be a sale 1 out of 10, I pay €20,- for advertising, and don't get any profit?

    I would like to hear your thoughts on this one. Thank you.

  2. I have a 6:1 return on PPC! I know my top performing Ad Groups and ads, however, I continue to pay theSEO agency because of the ongoing Google changes and value-add support… things that I don't have the time or to be candid the level of detailed interest to maximize my results.

    Tracking click thru & conversions is important, The quintessential criteria is the LIFE TIME VALUE of each PPC paying client. This also includes REFERRALS from that client. I track it monthly.

  3. Nick Supapol says:

    Hi Linda,

    Thanks for your question!

    Paid Search can be more challenging with smaller margins. However, if you put in the time to optimize your campaigns, it can be very profitable.

    The 1 out of 10 (10% conversion rate) is just an example I used. Continuously optimizing your account can improve your conversion rate further, bringing down your cost-per-conversion.

    It’s also important to consider micro-conversions, like email subscriptions and newsletter sign-ups. Maureen commented on a great point – understanding the life term value of each new customer and factoring any additional business or referrals from them.

    Look out for my upcoming blog, “8 Tips to Reduce Your Cost-per-Conversion” for optimization ideas.

    Nick

    • Linda says:

      Hi Nick,

      Thank you for the answer! I really appreciate it. And also Maureen off course. I will read your next blog. I think it will be very important to understand more. In the mean time, I will take a good look at the details, and try to optimize my account. Also I will add my option to subscribe on the newsletter on a more visited page.

      Thanks again, I'm looking forward to the next blog.

      Linda

    • Nick Supapol says:

      Sounds great, Linda!

      Also, have you considered Google Product Listings?

      They typically have much lower CPCs :)

      Nick

  4. Linda says:

    Hi Nick,

    Yes, there is a lot of work to be done :)

    Yesterday after your reply, I took a good look at on of my webshops and it's system. Here, I did found out about how I could add my products to Google shopping. (I think this is what you mean?) But at this time they are changing it from free to payed. (in Holland) I first will wait when this is done. Most of the time it isn't very convenient to start with something that is in a big change, better to begin after they made the change with success :)

    Linda