If you own an ecommerce store, online advertising is essential to the success of your business. Furthermore, pay-per-click (PPC) ads are one of the most affordable ways to generate profit through digital marketing. Unlike traditional advertising, where you must pay a base price per month or year, you can determine your own PPC budget based on what you think the ad space is worth.
However, determining how much you should spend on PPC ads depends on several factors related to your business, such as the characteristics of your leads, how much revenue a bid will generate, and more. Today, experts from an ecommerce PPC agency present the following guide on PPC campaigns and how to determine your PPC budget.
What Is PPC?
Pay-per-click marketing is a model businesses use to post advertisements on websites like Google, Facebook, or Amazon. Unlike traditional marketing, the advertiser only pays for the ad when a potential customer clicks on it, making it an attractive option for small companies with a limited advertising budget.
To publish a PPC ad, one must place a maximum bid on keywords or phrases that potential customers will search for when looking for a product or service. The bid — the amount one pays for PPC ads on search engines — depends on the quality of the ad (low-quality costs more per click) and the maximum amount an ecommerce site is willing to pay compared to other bidders.
Sometimes, PPC campaigns may appear on other websites that are not search engines. When publishing a pay-per-click ad on another website, the ad will pop up when a website user searches a keyword or phrase related to the advertiser’s keyword(s). PPC ads may also appear on these websites when they are relevant to the content of the site.
To determine which keywords or phrases will generate the most potential customers, you must think about your leads.
What Is Lead Generation?
Lead generation is the method ecommerce sites use to determine who their target audience is for a particular product or service. These leads are potential customers who have not yet committed to purchasing a product but have demonstrated interest. When determining a target audience, one can focus their PPC ad on generating leads.
To make pay-per-click advertising worth one’s time and money, it’s essential to determine what potential leads will most likely search for when considering the purchase of a product or service. The PPC ad must not only be high-quality but also appear at the correct moment (such as when a potential customer shows interest in a product or service).
Frankly, the more likely a lead is to use your PPC ad to purchase, the more valuable said lead is. We will discuss more about lead value below.
What Is PPC Bidding?
As previously mentioned, PPC bidding is the action of placing a bid to rank on a search engine related to a keyword. Bids determine the maximum amount of money one agrees to pay for clicks during a pre-determined period. As Google is the most popular search engine for PPC ads, we will focus on how Google filters and ranks PPC advertisements.
First, the amount that an enterprise bids contributes to its ranking on Google Ads. The more money a business bids, the higher it will rank. However, one doesn’t need the highest bid for their ad to rank within the top ads.
The Google algorithm ranks PPC ads by their relevancy to a search term, the quality of the ad, the maximum bid, and other factors. After checking these factors, the Google algorithm will assign an Ad Rank to the PPC ad.
Bids work on a sliding scale, as a business’s initial bid may not be worth the money if the Quality Score (assigned to the ad by the algorithm) of one’s advertisement is low. To determine whether your initial bid is worth it, you must collect data on your leads. You may consider how many clicks lead to cash and if the cost of your bid is worth the revenue you make per click.
How to Calculate the Budget Needed for PPC
To calculate your PPC budget — the maximum bid your business will pay while retaining click profitability — you should consider the following five factors.
1. Think About Lead Generation
First, determine your target leads to ensure your PPC bid applies to the correct keywords. When thinking about lead generation with your marketing team, consider the following:
- Quality of leads
- CPL (target cost of clicks per lead)
- Frequency of visitors generated by PPC ad
- Geographic location
- How many leads you want to generate from PPC ads
You should also determine your maximum budget for lead bidding and the value of said leads. If you believe that lead generation will produce the most profit for your business, invest more money into PPC campaigns. If you think leads are a secondary method to attract potential clients, invest more in other marketing sectors.
The value of your leads depends on multiple factors, such as how frequently a lead visits a website before committing to purchase, how long they spend interacting with content on your site, and more. You can also determine what time of day you receive the most clicks and adjust your bids accordingly.
Also, consider your conversion rate when determining leads. The lead-to-customer conversion rate is the number of leads that result in ecommerce sales (and thus how many leads you need in a month to generate profit).
2. Establish a Goal for Profit from PPC
Next, your marketing team must establish a profit goal for your PPC ad. To determine the profitability of a bid, use the following equation:
Number of Sales x Average Order Value (AOV) x Gross Margin – Bid Budget
Here is how we define each term in the equation:
- Number of Sales: The number of leads that turn into paying customers after clicking on your ad.
- AOV: The average amount of currency that each sale produces. To determine the AOV, you must simply calculate the average amount of money earned in sales produced by clicks.
- Gross Margin: The percentage of revenue your sales produce after subtracting production costs, shipping, goods/services, etc. To determine the gross margin percentage, you must use the equation (Revenue – Cost of Goods Sold) / Revenue.
- Bid Budget: Finally, you must subtract the maximum bid that you have placed on keywords or phrases for your PPC ad. This amount takes away from the overall profit generated.
Here is an example of how to work the aforementioned equation to determine your profits:
You produce 30 sales from your PPC ad with an AOV of $500 and a gross margin of 65% in one month. You decide that your maximum bid for a key phrase is $4,500. Your equation would look like this:
30 x 500 x .65 – 4,500
$5,250 is the amount of profit that your maximum bid of $4,500 will produce based on the aforementioned data. Likewise, you can also determine PPC budgeting without previous bidding data. If you want to produce a profit of $6,000 predicting the same sales mentioned above, AOV, and margin, solve the following equation to determine your maximum bid:
30 x 500 x .65 – (Maximum Bid) = $6,000
After solving the equation, we find that the maximum PPC bid to produce a $6,000 profit is $3,750.
3. Determine Your Starting Maximum PPC Bid
To determine your starting budget, you must perform calculations to estimate how many leads will convert to sales. Consider the following characteristics of leads and budgeting:
- Cost-per-lead: How much you want to spend per lead click.
- New Clients: Businesses most often target PPC ads toward potential clients rather than returning customers. You must determine the target amount of new customers you want to generate with a PPC campaign.
- Close Rate Percentage: Ecommerce websites measure the close rate with a percentage (how many leads turn into sales). This percentage is often low.
- PPC Leads Needed: You must divide the number of new clients you want by the close rate to determine how many leads you need to reach your goals. For example, 100 new clients / .10 (10%) close rate = 1,000 PPC leads.
So, when setting budgets for PPC, you must use all of these factors to determine your maximum bidding budget per month. For example, Google Ads may charge between $1-$2 per click for search ads. If we use the example of 1,000 PPC leads to generate 100 new customers with a close rate of 10% with a click cost of $1, you must calculate:
1,000 leads x $1 = $1,000 maximum PPC bid (in one month)
This puts daily spending at around $33.
4. Identify and Sort Keywords
You must apply your target budget to keywords or phrases that will inevitably generate leads. If potential customers don’t frequently search a specific keyword or phrase (aka search volume, determined monthly), it is unlikely that your leads will generate profit.
So, identify keywords that will most likely produce profit, the click-through rate (amount of PPC lead clicks / amount of times Google shows your ad) of said words, cost per click, etc. Find common themes that potential customers search for when looking to invest in a product or service.
To determine the best keywords out of what you have brainstormed, use a tool such as Google Ads Keyword Planner to determine the click-through rate and cost per click of each keyword. Determine whether low-funnel keywords (customer is in the exploration phase of purchasing) or high-funnel keywords (customer is ready to buy) are more profitable based on audience reach and lead generation.
5. Look at Past Performance and Adjust Accordingly
To determine whether your bid is fully covering every keyword theme that you have requested, you must use a paid search program to determine where you lose money and whether your bids are sufficient enough to show up in PPC ad spaces. You can find this information under the “competitive” metrics section in Google Ads or pay a service to perform these steps for you.
Invest in the Most Profitable PPC Ads for Your Business
If you need an expert marketing team to help you with PPC bidding, keywords, lead generation, and more, contact Bear North Digital. Our team commits to maximum return on every penny you spend on your marketing strategy. Call us at 218-216-8692 to maximize your PPC budget today!
Alternatively, check out our blog for other helpful topics like PPC best practices in 2023.