Author: Richard Converse – Director of Digital Marketing
The Best Marketing ROI Calculator for Creating a PPC Budget
You’ve heard it from everyone, pay-per-click (PPC) advertising can grow a business fast! But how do you know how much money to dedicate to PPC efforts? How do you calculate a PPC Budget? In this article, I will walk you through the most important steps to take when crafting a budget for online advertising. The question isn’t “How much should I spend on advertising?” Instead, you should ask and understand, “What price do I start losing money on advertising?” I have created a marketing ROI calculator that will make answering this question easy.
The Growth of Online Advertising
Online advertising has skyrocketed in the last decade and is a requirement for any successful marketing campaign. In 2020, 356 billion US dollars were spent on digital advertising – Statista (that’s nearly 1 billion dollars a day!). Even more, this number is projected to grow by another $100 billion by 2024!
There is a good reason for these numbers. It’s because it works. However, getting into online advertising can be intimidating. There are so many questions. Where to start? What platforms are most successful? How much should I be spending? Who should I be targeting? And most importantly, how do I make sure I am not wasting all my money? Well, these answers become clear when you first answer: How to calculate a PPC Budget?
The beauty of digital advertising, especially pay-per-click advertising, is that when set up properly it is the most efficient form of advertising out there. You can track every aspect of your campaigns and your customers’ interactions with your advertisements. Based on all this data, you can quickly tweak and modify your ads in real-time increasing your conversions within your budget. And then from there, you grow.
Understanding Your Ad Spend Limit
Tracking data won’t get you anywhere if you don’t understand your ad spend limit. Whether you are advertising on search platforms, social media, e-commerce stores, knowing your ad spend limit is will:
- Make sure you don’t overspend and waste money.
- Guide your decision-making into what type of ads you are using.
- Identify the most effective target market.
- Select financially efficient keywords for your search campaigns.
It’s a lot, I know. Bear with me. With all our marketing clients at Black Flag Creative, we first calculate their ad spend limit. This isn’t how much clients are willing to spend on advertising. Instead, calculating ad spend limit is understanding how much clients can spend acquiring a customer through ads before they start to lose profit. Once you know this, you then can start calculating ROI based on different lead conversion costs.
Calculate a PPC Budget with a Marketing ROI Calculator
As mentioned, the best way to calculate a PPC budget is to begin by finding your ad spend limit. To do this you will need to know the following 3 things:
- The lifetime value of your customer.
- Cost of product/service
- Lead to customer conversion rate.
LIFETIME VALUE OF CUSTOMER:
The lifetime value of a customer is important because you want to make sure you are not overspending on a customer who is not returning the revenue. The lifetime value of your customer will differ based on your type of business. With e-commerce businesses, it may be the average transaction amount on one purchase. If you offer subscription services, this would be the monthly subscription amount multiplied by the average lifespan of your subscriptions. For many specialized B2B businesses, it may be a collection of project fees and maintenance fees. Every business is different, but take your business’s realities to figure out what the lifetime value of your customer looks like.
COST OF PRODUCT/SERVICE:
This can be a variety of things including the cost of product, labor, commissions, etc. Take the average customer lifetime value and what costs are associated with it. Compare this number to the lifetime value to create a percentage of costs. Many businesses operate with a cost between 20-40% of their customer lifetime value.
LEAD TO CUSTOMER CONVERSION RATE:
This last number is relevant to businesses that first gather leads before converting them into paid customers with a sales team. If your business gains customers immediately through a transaction on your website, then this section is not relevant. However, if your business does use lead generation, figure out what percentage of leads convert to customers with your sales team. Is it 30%, 40%, or 10%?
Once you have these three numbers, you can input them into the calculator below. It will tell you how much a lead or online conversion is worth to your business for both revenue and profit. These numbers are very important and should become memory for you as a business owner or marketing manager. If you sell products/services directly online just select “no” to the first question and the Lead to customer conversion rate will disappear.
From there, the second part of the calculator will allow you to see how you can create a budget for a pay-per-click campaign. With all PPC campaigns, it is easy to track your cost per conversion, so this calculator will let you know the maximum cost per conversion you could maintain before losing money. Knowing this is key because all marketing strategy is then built around these numbers.
Using the Calculator:
This Marketing ROI calculator is a strong tool that can give you insight into a variety of different realities and constraints when it comes to marketing your business. However, the most effective use of this calculator is to identify your maximum ad spend limit (AKA your maximum cost per online conversion). Once you fill out the top of the calculator and identify your profit per lead/online conversion, then use the slider and your advertising budget to find your max ad spend. This will occur when the Estimated Profit and/or True ROI is at or just above zero. This is the maximum you can spend on obtaining an online conversion without losing money. And once you know this amount, you can then properly calculate a PPC Budget and select the optimum marketing channels and strategies to ensure a successful campaign.
Glossary of Terms
As mentioned above, the calculator will give you access to much more information as well. Below is a glossary of terms to clarify each piece of data resulting in the calculator.
Estimated Conversions: Number of leads or online conversions you can expect to receive based on the conversion costs set on the above slider within your advertising budget.
Spend on Ads vs Spend on Agency: Thousands of businesses use marketing agencies to manage their online advertising efforts. Digital Marketing Agencies offer pay-per-click services and are experts in all the strategies of managing online ad campaigns. Their efforts often result in better-performing ads (ie lower click costs, and lower conversion costs). Of course, the agency comes with a cost (usually around 30% of the total ad spend). Using the slider and checkbox above, you can see the difference it will have on your ROI, but with that said, conversion costs are usually significantly lower when using an agency.
Estimated Revenue: This number is simply the revenue your business is expected to bring in based on the ad budget and conversion cost and how much the lifetime value of the customer and/or lead is defined.
Estimated Profit: This number is much more important in my opinion. It is the amount of money earned after subtracting the marketing spend and the cost of goods services and labor. This is the number you want to remain positive, even if it is only by a small amount. It is the true sign of growth.
Marketing ROI (Return on Ad Spend): This is the most common number you will see in marketing reports. How much more money was made from the amount spent on marketing. It is a good number to look at, but keep in mind it does not take into account the cost of doing business. You can have a 300% Marketing ROI and still lose money. This is why the next section is so important.
True ROI: This is the true KPI for a successful campaign. True ROI first calculates how much money was made. Then subtracts the marketing expenses and cost of goods, services, and, labor to calculate true profit. Then compares the profit to the marketing dollars spent. (ie Your business made $100, but it costs you $30 to produce the goods/services and $25 in marketing. The profit is ($100 – $30 -$12) = $45. The $45 is compared to the dollars spent on marketing ($45/$25*100) = 180% True ROI. Whereas, the Marketing ROI [Return on Ad Spend] is $100/25*100 equally 400% ROI.
Now that you know your ad spend limit to achieve the Marketing ROI you desire, you can now craft a successful campaign. By staying within these constraints within your PPC budget, you are guaranteed growth in your business. With growth, then the advertising budget can increase which leads to exponential growth.
The next steps include analyzing your audience, competition, and marketing channels. The experts at Black Flag Creative will work with you to create successful campaigns on a variety of online platforms. We can identify which channels will have the best conversion rates for your business, and we can create and manage advertisements on all these channels. We will constantly run A/B tests on your campaigns to ensure we are running the most optimized ads for your business. With our services dedicated to supporting your digital marketing efforts, this will allow you to focus more on growing your business.