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 I’ve prepared this article. We’ll show you everything you need to know about defining your advertising budget. You can use this as PPC budget forecasting template
Let’s dive in!
1. What Is PPC Budget and What Does It Depend on?
2. How to Calculate PPC Budget
3. Cheat Sheet: PPC Budget Calculation Formulas
What Is PPC Budget and What Does It Depend on?
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.
The trick of PPC advertising budget calculation is in minimizing the costs, and not spending more than you need.
How to Calculate PPC Budget
Before we get started, you should understand the difference between the 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!
1. Define Your Business and Advertising Goals
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:
Lead generation and customer acquisition
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 products through PPC advertising over the next fourteen days.
The more specific your goal is, the better. So you have an advantage when you set PPC budget.
Vague goals just won’t do, and they’ll make calculating an accurate budget nearly impossible.
2. Understand Traffic Generation Requirements
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: Traffic required = 100 customers / 2% = 5,000 clicks Or Traffic required = 100 customers / 4% = 2,500 clicks
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.
3. Get an Estimated Cost per Click
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:
The best option: Historical data based on your previous campaigns for similar keywords and with similar ad content
Okay option: Use Google Keyword Planner to get a CPC estimate based on target keywords, location, volume, and competition
Only-if-you-have-to option: Use industry benchmarks
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:
Navigate to “Get search volume and forecasts”
Enter your target keywords
Find: Max CPC and Avg CPC
Jot it down
4. Calculate Your PPC Advertising Budget
So far, you’ve got the following variables:
Goals that dictate how many people you need to convert to get a return on investment, and how fast you need to convert them (e.g. 100 customers in 2 weeks)
Average conversion rates (2% and 4%)
The number of clicks you need to get customers (between 2,500 and 5,000)
Cost per click ($2.50 – $3.00)
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:
1. Highest traffic needed x Highest average CPC = Highest total budget
2. Lowest traffic needed x Lowest average CPC = Lowest total budget
In our case, our calculations would look something like this:
5,000 visitors x $3.00 average cost per click = $15,000
2,500 visitors x $2.50 average cost per click = $6,250
Our SaaS example’s PPC advertising budget could range from $6,250 to $15,000 for the next two weeks.
5. Calculate ROAS
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.
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.
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 = 300%
High ROAS = ($60,000 – $6,250) / $6,250 = 860%
Our ROAS would be between 300% and 860% based on the information provided.
This is how you can easily calculate PPC Budget using the below formulas:
Define your goals (How many customers do you need to achieve your goals, and how fast do you need them?)
Calculate traffic generation requirements (How many visitors do you need to convert the number of customers you need? If you have varying conversion rates, repeat the calculation twice for highest and lowest conversion rates.) Formula: Traffic Generation = New customers needed / Conversion rate(s)
Get an estimated cost per click (Use historical data or Google Keyword Planner to get max and average CPC.)
Calculate your PPC budget (Calculate it twice – for max and average CPC.) Formula: Total PPC Budget = Traffic needed x Average cost per click
Define your average order value (Get it from historical data.)
Calculate your expected ad revenue Formula: Expected revenue = Average Order Value x New Customers
Calculate your ROAS (Calculate it twice – for low and high ad spend, pull it from your PPC budget figures in step 4.) Formula: ROAS = (Revenue – Ad Spend) / Ad Spend
And there you have it!