Welcome to Part 2 of “Tips for Determining your Ideal PPC Budget”. Last week, in Part 1, we started talking about a strategy for determining your ideal budget for PPC (for those who haven’t been lucky enough to have such a budget imposed upon them from above). This strategy helps take a lot of the guesswork out of the process, and can give a pretty close to accurate projection of what a business could expect to gain under various budget scenarios. We figured out our average sale amount, our estimated conversion rate, and our estimated cost-per-click in Part 1. And now, it’s time for the fun part…
Let’s Do the Math!
Using your average sale amount, your estimated conversion rate, and your estimated CPC, you can make predictions based on different budgets.
Let’s start with a very modest budget of $5,000/month. The average sale amount is $200, estimated conversion rate is 1.5%, and average CPC is $1.50:
$5,000/month (budget) /$1.50 (CPC) x 1.5% (conversion rate) x $200 (average sale amount) = $10,000 (net revenue)
Not bad! But you need to factor your costs, including cost of goods, click costs, and any fees for a professional PPC firm to manage your campaign (I wouldn’t recommend trying to run a PPC campaign without quite a bit of training, as it is so easy throw money away if you don’t know all the ins and outs). Let’s say you’ve paid a PPC firm $2000 to manage your campaign for the month, and that for every order, 45% of the selling price goes toward manufacturing costs:
$10,000 (net revenue) x 65% (portion of product revenue retained after factoring production costs) – $5000 (click charges) – $2000 (management fees) = -$500 (immediate gross profit)
Oh no! After factoring in your costs, you’re in the negative. Of course, if you consider longer term effects such as likely future repeat purchases by these new customers, not to mention synergies between PPC and other sources of traffic, you’ll get a lot more than the immediate figures indicate. Still, it seems that at this level of spending, you can’t really expect to earn much ROI, if any, up front. Even if you were to bring up conversion rates significantly, the return would be in the positive, but still relatively low.
Increase the Budget, Increase the Returns
Let’s see what happens with a $15K budget. We’ll factor more out of the overall budget for management costs, and assume our firm has been able to at least keep conversion rates steady:
$15,000/month (budget) /$1.50 (CPC) x 1.5% (conversion rate) x $200 (average sale amount) = $30,000 (net revenue)
$30,000 (net revenue) x 65% (portion of product revenue retained after factoring production costs) – $15,000 (click charges) – $4000 (management fees) = $500 (immediate gross profit)
That’s looking a lot better! It’s not a huge immediate profit, but it goes to show how increasing scale can tip ROI in your favor. Of course, if conversion rates are increased, ROI is boosted and more gross profit is ultimately generated. For instance, in the above scenario, if conversion rates were brought up by just 0.5%, profits would increase significantly:
$15,000/month (budget) /$1.50 (CPC) x 2% (conversion rate) x $200 (average sale amount) = $40,000 (net revenue)
$40,000 (net revenue) x 65% (portion of product revenue retained after factoring production costs) – $15,000 (click charges) – $4000 (management fees) = $7,000 (immediate gross profit)
By using formulas like this, and experimenting with different budgets, conversion rates, and CPC, it can take a lot of the guesswork out of what to expect from your campaign. PPC is a bit unpredictable, so any calculations you make shouldn’t be read too literally, but formulas like this can definitely help to give direction as to how much of an investment and what sorts of conversion rates will likely be needed to return positive ROI.