Setting a PPC Budget

I originally wrote this in response to a question on LinkedIn. It quickly became lengthy so I decided to post it here as well. The question was “Can anyone suggest an Adwords monthly budget for a niche consumer medical product?” It’s a common question that applies to any product or service you might sell online.

Assumptions you have to make when calculating your PPC budget

Before you can set a monthly PPC budget, you have to answer two questions:

1. How many sales do I need to generate each month?; and
2. What conversion rate am I going to assume?

PPC math

The rest is fairly mathematical:

1. Take the number of monthly sales your business plans to generate through this channel (from above – let’s say 1000)
2. Decide on a conversion rate that you assume you’ll be able to accomplish (also from above – let’s say 2%)
3. Divide #1 by #2 (e.g. 1000/2% = 50,000). This is the number of clicks you’ll need to buy to reach your goal (assuming you estimate conversion correctly – more below)
4. Determine the keywords you’ll be targeting and calculate the average CPC you’ll be paying for those words (AdWords provides a recommended bid)
5. Multiple #3 by #4. (e.g. 50,000 * $1.57 = $78,500)

That’s your monthly budget. Be sure to check that the cost of acquisition is acceptable compared to your product’s margin – I’ve seen that step get overlooked before!

The science of PPC meets the art of PPC

If that seemed too simple it’s because it was.

What makes this whole PPC thing hard is getting the conversion rate right. I know I’m oversimplifying, but the really tough question is “what conversion rate will I’ll get for a new medical supplement for cancer patients?” This is where you’ll get a wide range of opinions and you really need to do some research specific to the niche you are entering. Beware of web sites and experts with a blanket statement of “10% is a reasonably conservative number” – 10% is blowing the doors off!

Healthcare/pharmaceuticals (for instance) is VERY competitive and I’d expect that until a company develops brand recognition and trust conversion rates will be VERY low. Also, keywords will perform differently, some landing pages will perform better than others, etc. You are going to have to research your niche and then still guess to arrive at a good number.

PPC Best Practice: Acknowledge what you don’t know, test, and optimize!

My best advice is to acknowledge that whatever the number you propose you’ll need to be flexible based on actual results. Start by setting a daily spend limit that will yield enough data to test (probably more than the typical $50!), analyze your results, refine your approach – keywords you invest in, optimizing landing pages and shopping carts, etc. – and eventually you’ll end up with the right level of spending. Or you may find out PPC isn’t right for you. Don’t give up until you’ve optimized, though.

Good SEO/inbound marketing can save slash your PPC costs

I’ve seen good SEOs cut PPC budgets in half, or even eliminate them altogether by being better than the competition at getting organic placement. Those links get clicked on more often, too. If your niche will be very competitive your ability to place in rankings will be influenced by much more than just on-the-page optimization. You should consider partnering with a good “inbound marketer” to help maximize your online presence with off-the-page strategies. If my example budget is anywhere in your ballpark think of how much money you could save by cutting your investment in half.