PPC advertising is one of the most important modern advertising trends. Nowadays, it’s quite hard to imagine a successful business not using this powerful promotion tool. Pay-per-click (PPC) marketing seems to be the best solution for getting relevant traffic that will convert to leads and sales. It can result in significant profit growth and increased awareness of your business or product.

At the same time, PPC advertising does have an entry barrier. At first, it may seem that advertising with Google Ads is complicated because of the numerous settings and strategies that needed to be implemented and it can sometimes be unclear as to how much Google advertising actually costs. In other words, it’s hard to determine the right PPC advertising budget for Google Ads campaign.

The good news is that the cost of Google Ads campaign is actually quite easy to identify. All you need to know are certain indicators and a simple formula for further calculations.

In this article we’ll consider the following aspects:

  • What indicators are needed to determine the PPC advertising budget

  • How to calculate the right PPC advertising budget for your business

  • What situation can potential advertiser fall into

  • What other budget estimation methods exist.

First things first, you need to identify the basis for future calculations. This basis should correlate with the goals that the potential advertiser wants to achieve with the advertising campaign.

Required data

Here are two simple formulas which will be used in further calculations:

PPC Budget = (Number of Customers / CR2) / CR1 * CPC

Number of customers = (Revenue / Sales Period) / Average Sale Amount

Let’s consider each of the indicators from the formula above in detail. We’ll skip the obvious things (Revenue, Sales Period and Average Sale Amount) and will concentrate on the lesser known indicators.

Number of customers

Each advertiser sets their own business objectives. Using the revenue indicator, business objectives can be estimated in monetary value. So the advertiser sets the desired revenue and has to calculate how many customers they need to sell their product to in order to achieve the desired result.

CR2 (Conversion Rate 2)

CR2 stands for the close rate of your sales team. In other words, CR2 is how many leads your salesmen close as a percentage of the total. For example, if your sales team closes 1 out of 2 leads, the conversion rate will be 50%.

CR1 (Conversion Rate 1)

CR1 can be described as a conversion rate of your website’s visitors. In other words, how many of your website visitors turn into potential customers. For example, if 1 out of 100 visitors turn into a lead after they visit your website, the conversion rate is 1%.

CPC (Cost Per Click)

CPC (cost per click) refers to the price of the click. In other words, CPC is the amount of money the advertiser pays to the system for every click on their ad. Cost per click is affected by various factors — the ad itself, CTR (click-through rate — the ratio of users who click on a link compared to the total number of users who view it). The ad must meet the search queries of the user.

At the same time, the advertiser must take into consideration the competition in the geographic regions where they want to advertise and the times of the day when they plan to advertise. The minimal cost per click in Google Ads is $ 0.01.

Google offers its own CPC estimation tool — Keyword Planner. It shows the maximum and the average cost per click of keywords you want to include in your advertising campaign. Here’s a small guide on how to use it:

1. Go to Google Ads and log in to your account

2. Click Tools, find the Planning column and click Keyword planner

3. Choose Get search volume and forecasts

4. Enter the keywords you’re interested in separated by commas and click Get started

5. Find Max. CPC and Avg. CPC columns and look through values displayed there

Important: Your CPC can be affected by different variables including the type of the product, quality score, current auction conditions, and more. Consider the Keyword Planner as a tool of initial analysis.

Calculations

Now let do some math. Let’s say the advertiser’s revenue is $ 10.000, the sales period will last 2 months and the average sale amount is $ 1.000. In this case:

Number of customers = (10.000 / 2) / 1000 = 5 customers

The advertiser needs to acquire 5 customers in order to achieve $ 10.000 of revenue within 2 months.

Now let’s enter these values into the second formula and calculate the PPC budget needed to achieve advertiser’s business objectives. CR2 = 50%, CR1 = 1%, CPC = $ 0,5. Thus:

PPC Budget = (5 / 0,5) / 0,01 * 0,5 = $ 500

Simple math shows that $ 500 will be enough to buy 1000 clicks, which will be converted to 10 leads and 5 real customers. These 5 customers will provide the advertiser with $ 10.000 revenue which will meet his business objective. So, $ 500 can be called an effective PPC budget for this particular campaign.

As you can see, the calculations above are quite simple and don’t require advanced mathematical skills. When you have all the required data, there’s should be no problem in understanding the budget need for a successful PPC advertising campaign.

Most advertisers don’t have all the required information because of various reasons including:

  • They have no idea what the conversion rate of the sales team is

  • They have no idea what the conversion rate of the website is

  • They don’t know where to find information about the cost per click.

In this case, accurate calculations are impossible and the advertiser has to estimate the PPC using other methods and information they have has access to.

Situation 1. Enough data for calculations

In this case, the campaign is already running and there’s enough statistical data for the accurate prediction of results. The advertiser has all the numbers required for calculations which simplify the whole process.

It’s important to keep in mind that this is all about making predictions. In reality, the outcomes can differ greatly from the predictions due to numerous factors, such as:

  • CPC growth. For example, more advertisers can enter the auction with higher bids. In this case, there’s a need to recalculate everything in order to understand the situation.

  • Your website’s conversion has changed. This can happen because of the changed rivalry conditions. For example, if a competitor offered a more favourable product than you did and your customers switched to them. At the same time, the website’s conversion rate can be affected by technical issues.

  • Low demand. A company can face low demand due to the seasonality of the product. The demand could also be temporary.

All these conditions must be considered in order to make accurate predictions and better determine the pay-per-click advertising budget.

Situation 2. Organic traffic as an estimation basis

If an advertiser is willing to launch a Google Ads search campaign, there is one more PPC budget evaluation method that can be used. Organic visits to the site can give an understanding of which search phrases best fit your business. Choose those search phrases which resulted in the most conversions. These phrases can be used as a basis for semantics collection for the Search campaign. In this case, the advertiser assumes that the PPC campaign will result in approximately the same amount of clicks and conversions as organic search traffic did.

Beware of high bids! eLama Smart Bid Calculator will eliminate the possibility of overpaying and will help you to identify the most efficient Google Ads bid prices with respect to your business objectives.

Important: The number of real conversions will differ from the expected ones. It could be higher and lower, that’s why advertisers need to understand that this evaluation isn’t the most accurate one. You can always adjust your strategy and change the campaign if needed.

Situation 3. Data from other advertising channels

The advertiser could have already launched a Facebook targeted ad campaign, got the results and now want to launch a Google advertising campaign. The results of the Facebook ads campaign can become the business objective of the Google campaign. In other words, the advertiser can assume that they can run Google pay-per-click campaign approximately at the same level as they did with Facebook.

Important: This method is more about setting business objectives rather than estimating the PPC budget. An advertiser can set it up due to accumulated statistics.

Situation 4. No data at all

For example, an advertiser has a brand new business or product and there is no conversion data due to the novelty of the object of advertising. In this particular case collecting statistics will be the primary business objective for the advertiser. Setting sales and conversion objectives in this instance isn’t recommended because of the lack of data.

Usually collecting statistics from 2 — 3,000 site visits is enough. This statistical sample will be representative and will exclude the risk of statistical fluctuations caused by random events. It’s important to keep in mind that making conclusions based on a smaller sample size make your expected conversion rate less reliable.

eLama UTM-tagging Tool can help you in gathering statistics and analyzing it. It will create and add UTM-tags to your search campaigns and make analysis much easier.

The pay-per-click budget directly depends on the experience of an advertiser. If there’s a lack of experience, more money will be spent because they’re running non-optimal campaigns.

Alternative ways of PPC budget determination

Sometimes the methods of PPC budget determination mentioned above aren’t applicable because of a few reasons. In this case, the potential advertiser should pay more attention to alternative ways of pay-per-click budget calculation. Competitor analysis is one of the possible options.

Competitor analysis

Everything has already been invented before. According to this axiom, every new business already has competitors who have entered the market before and operate there now. That’s why precise competitor analysis can give a greater understanding of current market conditions and can even answer the question «How can I calculate my PPC marketing expenses?»

During competitor analysis the advertiser should answer the following questions:

  • How much do my competitors spend on paid ads?

  • What exact keywords do they use when running PPC campaigns?

  • What products do my competitors advertise on Google?

Important: You need to conduct scrupulous and extensive research. It means that 2 competitors taken into consideration wouldn’t be enough; looking at 10 competitors is a recommended minimum. After you identify your competitors and gather all the required data you’ll be able to estimate the size of your potential budget.

Negative consequences of a poorly estimated budget

A poorly estimated budget can cause a bunch of negative consequences, which will result in money loss and a decrease of the effectiveness of the company itself. Here’s the list of potential negative outcomes caused by incorrect budget evaluation:

  • Low-quality ad campaign. If the budget was underestimated, the ad platform won’t have enough time and space to unlock it’s potential and show satisfactory results. An overestimated budget can mean the money spent on PPC ads is higher than any profits you make from sales. Being accurate when estimating the PPC budget can eliminate these troubles.

  • Loss of one of the best promotion channels. Poor results of the pay-per-click campaign caused by incorrect budget evaluation isn’t the best thing to tell top managers about. Those decision makers won’t spend money on ineffective promotional channels so it can result in the loss of one of the most growth-driving promotional channels, missed customers and a reduction in profit.

  • Shifts in the marketing budget. Marketing departments who launch Google Ads pay-per-click campaigns will be surprised to see that it needs much more money than expected because of the incorrect budget estimation. The necessity of spending more money on PPC campaigns can shift the marketing budget and cause organisational chaos.

PPC budget evaluation is a complex process, but now you know how to do it

Basically, that’s all. In this article, we shared two important formulas and taught how to use them. Moreover, we took a look at common questions and blind spots, considered different situations and alternative ways of estimating pay-per-click advertising budgets.

In conclusion, we want to emphasize that nothing is better than practice and testing. Everything is hard when you’re doing it the first time, the more tests you complete, the better the results you’ll receive.

Once again — pay-per-click marketing is a dynamic and changing phenomenon. You must track all indicators which can affect the final result. Be careful and keep your eyes open!

Do you have experience in PPC budget calculations? Don’t hesitate to share your experience with us in the comments section!