One of the top questions I hear from clients and prospects is, “How much should our budget be for pay-per-click advertising?”
The answer to identifying the appropriate PPC advertising budget depends on projections, assumptions and math. In this article, I’ll dive into a few of the formulas we use to help companies determine how much to spend on online advertising.
Lead Generation Formula
The core purpose of running paid ads is to achieve a business objective. We use a lead generation equation to help us reach that objective. The equations are simple:
(Revenue / Sales Period) / Average Sale = Number of Customers
Number of Customers / Conversion Rate = Number of Leads
Number of Leads / Conversion Rate on Traffic = Amount of Traffic
Let’s fill in these equations with some real numbers. Let’s say there is a revenue goal of $1 million. There are 12 sales periods per year (recurring monthly revenue) and the average sale per customer is $1,000.
($1 million / 12) / $1,000 = 83.33 customers
To get to $1 million in revenue, you’ll need about 84 customers. Now, let’s assume your sales team closes one out of every five leads, or 20%.
83.33 customers / 20% = 416.66 leads
Assuming a 20% close rate, you’ll need about 417 leads per year. Let’s assume 5% of your paid advertising traffic actually fills out a contact form to qualify as a lead.
416.66 leads / 5% conversion rate = 8,333.33 visits
With a 5% contact form conversion rate, you’ll need about 8,334 website visits to generate 417 leads, which will translate into 84 customers, which will equate to $1 million in revenue.
Of course, that’s if the numbers work out, which leads us to the next step in determining an advertising budget.
Existing Marketing Strategy
Paid advertising is only necessary if other marketing tactics fall short of achieving your revenue objective. Essentially, paid ads can help make up for the shortcomings of search engine optimization, email marketing, social media marketing and other forms of marketing meant to drive leads for your business.
Which marketing assets are currently driving results?
Taking into account how SEO, email, social and other marketing tactics are performing provides a more holistic marketing strategy. For example, if the strategies for SEO, email and social get you to 75% of your revenue objectives, then you’ll know paid advertising needs to account for the remaining 25%. Instead of driving $1 million in revenue, paid advertising can focus on driving $250,000 of revenue.