This is a pretty typical part of my initial call with a prospective client.
Me: What is the budget for your PPC?
Prospective Customer: If I can put in $1 and get out $2, then as much as we need. (laughing)
Me: Of course, but how much will the initial budget be while we test and figure out how much comes out for every $1 we put in?
Prospective Customer: Hmm. What do you recommend?
Me: [shakes head]
Setting a budget for your PPC efforts is a critical component of any management and optimization effort. Here's why.
Why You Need A Budget
Unless you're Apple, Google, or Facebook you probably don't really have an "unlimited budget", even for wildly profitable channels. Businesses have cash flow constraints and any channel is subject to diminishing returns. But at an even more practical level, you need a budget for one major reason:
Optimization implies choosing better options over less desirable options. Without knowing all constraints, of which budget is a MAJOR one, it is very difficult to make the best optimization decisions.
If you only get one thing from this post, remember that sentence.
Now that we've established why you need a budget, let's talk about how one arrives at a number.
Setting A PPC Budget
I will discuss two main options. There are an infinite number or ways to do this, but my experience has shown that these two methods are the most efficient.
Option 1 - Analyze past performance
For this option you look at what you've spent in the past and determine what worked and what didn't. You need to set a threshold for success. For example, say the goal CPA is $100. You then see which portions of your previous PPC spend were able to achieve or beat that benchmark. Anything that did you keep. Anything that didn't you drop.
Then look at the spend that met the threshold. Look specifically at the impression share. Areas with low impression share are areas where you can get more volume, either through a larger budget or increased bids (or both). Estimate how much additional budget for each area based on the current impression share.
Now add up your estimates and you've got a rough budget.
Option 2 - Work backward
This option starts with the end in mind. Think of the high-level goal for marketing. Is it to generate $X of sales? Is it to produce X number of leads for the sales team? For this example, let's consider a marketing department tasked with producing 500 leads.
Now ask yourself what is the target CPA for these leads? If you're in ecommerce this could be a percentage of sales, but let's say that our example company has a target CPA of $250 for their leads. Don't forget that there is a quality aspect involved, but we're keeping things simple.
500 leads X $250/lead = $125,000
Having a PPC budget is critical to successfully managing and optimizing any PPC effort. Obviously some of your budgets will be handed to you by a higher-up. That's fine. You can manage & optimize the heck out of that budget no matter how insufficient or exorbitant it may seem. But if you're wondering what your budget should be, consider one of these two methods.
- Small Business PPC - 26 Mistakes That Cost You Money (Jennifer Osborne)
- 5 Strategies For Dealing With Restricted PPC Budgets (Amanda West-Bookwalter)
- How Much You Should Spend on Pay Per Click Advertising (Nick Supapol)