Estimated Reading Time [est_time]
Paid Search (PPC) like Google Adwords and Bing Ads are important for businesses of all sizes. Today we look at how much we should invest to get the best return.
A typical scenario: You are looking for pay per click (PPC) help. Whether that be hiring in-house or engaging a new agency you possibly have a list of questions and unknowns longer than your arm.
As a long serving agency in this space we have worked with large and small organisations across many industries, we are often asked the same questions. Sometimes it can be difficult to get the answers you are looking for, so you have come to the right place.
The number one question we get asked:
How much should I be investing in pay per click?
It isn’t an easy question to answer but let’s deconstruct this question and look at it this way;
Firstly you need to establish what market you are in. By that I mean how competitive it is, how much the average CPC (cost per click) is, how many people are searching for your products, services and solutions. Once you have established this, we can run some models to help understand how much you should possibly spend on your pay per click campaigns.
Taking a CTR of 2%, if your CPC’s range on average from £0.10 to £0.50 and the volume of people searching for relevant keywords is over 500k per month, you would expect to receive 10,000 minimum monthly clicks. At £0.50 per click, this equates to £5,000 media spend.
However…
If your CPC is more like £5 to £10 per click, on the same volume of searches (500k), then your spend may look more like £25-50K per month. 500K clicks @ £5 per click = £25k media spend.
In order to spend the ‘right‘ amount, you now need to look at your goals and targets to reverse engineer the numbers and work out how much you should be investing.
First gather all of your relevant metrics:
Average Order Value (AOV) = £800
Previous revenue = £2m
Sales last year = 2,500
Conversion rate = 5%
Then pin down your goals and targets:
Target revenue increase = 10% (£2.2m)
Target = 250 additional sales
250 sales / 5% conversion rate = 5,000 required clicks
If your CPC is £6.00, media spend should be £30,000
WE ARE NOT FINISHED YET!
How much are you willing to pay per lead based on your profit margin?
Calculate your Cost Per Acquisition (CPA) from the model above:
Total media spend £30k / Total sales 250 = £120 CPA
Now work out how much you’re willing to pay per sale.
For example:
AOV = £800
Your profit margin 50% = £400
Therefore, you may be willing to invest 20% of profit per sale = £80 target CPA
Therefore the original model gives a CPA which is too high to be profitable. Now the tricky part, to adjust your CPC’s and increase your conversion rate, to meet the desired CPA.
NOTE: If you reduce your CPC’s too low you may reduce your average position too much and although your CPA could reduce, clicks and conversions may also drop off.
£80 target CPA x 250 sales = total spend £20,000
£20,000 media spend / 5,000 clicks = £4 average CPC
From this calculation we can afford to spend on average £4 per click as long as we convert at 5% in order to come in at 20% of overall sales profit.
This model should help give a really strong direction on budget.
Beware of the pitfalls
If your industry CPC’s are £20 then don’t kid yourself about getting a £0.50 CPC or even £10. It’s going to be tough in these competitive spaces.
The next question to follow how much, is normally:
When should I see results from pay per click?
PPC is a fairly instant channel but from “launch” to ”well oiled” takes time.
Month one, if you are new to PPC, can see instant results but you are going from nothing to something! If the account has been running and an audit needs to take place then there can be fluctuation in the first few months whilst changes are being made, structures are updated and keywords are optimised.
We work on a progress basis over the first 3 months, you should see improvement each month on the previous, however this might not yet meet the overall targets.
By month 4 there should be some good improvements on either your previous account or compared month on month as you go. Every client’s goal is different but if by month 4 things are still down or going the wrong way..something is possibly wrong.
Pro Tips:
If you are comparing year on year data, know what was different last year. All too often data is compared year on year when the market, website, brand, messaging, budget, or business in general was different. Think about the weather. March 2018 saw abnormal snow storms which may have affected the business compared to the previous year.
Always look back at trends and use analytics across all online marketing channels to compare monthly and annual trends.
Finally, make sure you are benchmarking all results, not just your PPC. If PPC is flat but all other channels are down, that paints a different story.
For more help on analysing and reporting take a look at 10 tips to making your reporting days easier.
In summary;
How much should I be investing in pay per click?
Calculate how much can you afford to spend per sale, and calculate the recommended costs based on market CPC’s and volume of searches.
When should you see PPC results?
Some immediate, but on track with goals and targets a good rule of thumb is 3 to 4 months.
