PPC Strategy,

How to Calculate Your PPC Budget in 4 Simple Steps

Zlati

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The success of any paid advertising intuitive depends on how well you plan. Effectively, implementing an actionable plan into your budgeting process can help you uncover the full potential of your business’s digital efforts.

Let’s take a deeper look at the main steps to calculating your PPC budget and discover valuable tips to guide you along the way.

What Should Be Your PPC Budget?

Having a predefined/forecasted PPC budget is immensely helpful for staying on track with your strategy, setting benchmarks and goals, and planning long-term.

That said, there is no static number on what you should spend on paid advertising, and there shouldn’t be. After all, goals and spendings change, and so do budgets.

As a general rule of thumb, however, your budget will largely depend on a few main components, such as your website conversion rate, the cost of your industry’s keywords, and the average lifetime value (LTV) of your customers.

4 Steps on How to Determine Your PPC Budget

Although there might not be a set number that will work for every business, you’ll still want to avoid going in blind and spending your entire budget without results.

Let’s walk through a 4-step framework that can help shed some light on how to estimate the right PPC budget for your business.

Step 1: Identify the Best Keywords for Your Marketing Objectives

Before you can determine a fitting PPC budget, specifically for a Search campaign, you’ll need to identify the search terms potential customers are using when looking for your product or service.

While this can be straightforward for businesses such as e-commerce stores, it can get tricky if your product is a solution to a niche problem. In such cases, you have to determine how to best track the effectiveness of your marketing dollars.

Your first step here should be focusing on keywords with immediate purchase intent. High-intent keywords will likely have a higher conversion rate and click-through rate.

Step 2: Run the Keyword Planner Report

Google’s Keyword Planner is a powerful tool for refining your audience and budget. It offers several options that allow you to look for new keywords, combine keyword lists, get click and cost performance forecasts, and show search volume data and trends.

Within each option, you will get a list or report which you can filter based on various elements, including average monthly searches, ad impression share, and suggested bids based on the CPC that other advertisers are paying for keywords with the same setting you’ve selected.

Alternatively, tools such as Ahrefs or Semrush are great one-stop shops to consider for your SEO and PPC needs. Their keyword tools offer access to accurate keyword data, insights, and detailed filters.

Note: whichever tool you use, remember that those numbers are not set in stone. Rather, they’re an estimate from which you can work out the worst and best case scenario (e.g. by dividing/multiplying by 2)..

Step 3: Do the Math

To establish a suitable advertising budget, many PPC experts use a sequence formula.

As a rule of thumb, you should start by multiplying the average monthly searches of all relevant keywords (based on your Keyword Planner report) by a targeted search impression share (often 50% or 70%). This will give you the possible number of impressions your ads might receive for all keywords involved in the research.

Once you have the volume of impressions sorted out, the next step is to establish the potential volume of clicks. Here, you want to multiply the impressions by an expected CTR (click-through rate).

Tip: If you need some extra help figuring out your CTR, you can look up the click-through benchmarks by industry to establish a good metric for your business.

Now that you have your potential volume of clicks, it’s time to calculate your PPC budget. To do that, multiply the potential volume of clicks by the average CPC you got from the Keyword Planner report.

Your formula should look like this:

potential volume of clicks x average CPC = potential ad spend

Here’s a quick overview example:

Step 4: Estimate Your Profitability

Using return on ad spend (ROAS) as a proxy for estimating digital advertising performance is a go-to tactic for most marketers.

Essentially, figuring out how to measure target ROAS is not as complex as it may seem. It is the ratio between the amount spent on an ad campaign and the total revenue it brought with it.

Here’s where it might get a little tricky: ROAS typically only counts the price of a customer’s first purchase towards ad campaign revenue. For SaaS businesses working in the subscription space, considering ROAS together with the customer’s lifetime value (LTV) is crucial for establishing profitability.

Generally speaking, calculating LTV will depend on your business plan and revenue model. With that in mind, you will still need to estimate the average sale value, profit margins, churn rates, average number of transactions per client, and average customer lifespan.

To decide which campaigns would be most profitable, you’ll also need to measure the customer’s LTV against the customer acquisition costs (CAC) for each campaign (or, the average cost you pay to acquire a new customer).

Ultimately, the lifetime value of a customer should be about three times more than the cost of acquiring them.

Top 3 Tips to Remember When PPC Budgeting

While having an advertising budget is key, preparing one can be an overwhelming task.

To help along the way, here are three tips you’ll want to keep in mind when working on your budget.

Choose the Best Budget Type

When it comes to setting paid search budgets, companies have several different options to choose from. Common approaches that marketers and advertisers take include:

  • Prior-year-based budget – the budget is determined based on a certain percentage of the previous year’s total sales or the average sales from the last few years
  • Percentage of sales budget – the advertising budget is set according to competitive or industry benchmarks
  • Objective- and task-based budget – the PPC budgeting is set based on the planned marketing/advertising activities

All things considered, marketers often decide on a final budget by combining different approaches. Oftentimes, this can produce a more effective estimate of the expenditures needed to meet your PPC goals.

Another important factor to consider when selecting a budget type is the advertising platform itself. Naturally, different platforms work better for different companies, and determining which will work best for reaching your audience can be difficult.

If you’re just getting started and thinking about Facebook vs Google advertising, for example, consider splitting your PPC budget equally between the two platforms. This will help you get a better feel for the tools and functionality on both platforms and determine which one gives you a better return.

Consider Forecasting

In PPC, forecasting refers to the way that you use data to make predictions. Essentially, the goal of PPC forecasting is to get as much quality data as possible to make a well-informed prediction of what impact different scenarios might have on your PPC campaigns.

The Cost Per Click (CPC), for instance, is a type of data that is often included in forecasting reports.

Consider this example: If you offer a product with a very low entry barrier and your price point is not competitive, the CPC can often be predicted based on factors such as new market players coming in or current competitors putting big budgets behind the bids.

In effect, knowing when Google CPCs skyrocket can help you get your CPCs under control and protect your profit margins on time.

Be Flexible

When it comes to PPC budgeting, being flexible allows you to promptly respond to changes in the marketplace, developing opportunities, and arising problems.

If a certain advertising platform is generating most of your business, for example, you can shift more of your budget to that medium. You could also raise promotional spendings when sales rise or cut those spendings during downturns.

Taking Your PPC Campaigns to New Heights

When working through these steps, remember that pulling meaningful data to support your decisions – whether that’s historical PPC campaigns or insights from Google Analytics – will go a long way.

To cut down on any unpleasant surprises, you’ll also want to set up realistic ranges for both your goals and likely outcomes.

If you need more guidance, the Hop Online team of experts is always here to help. Take a look at our variety of PPC services and how your brand can benefit from them.

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