PPC – Return on Ad Spend

One of the main questions we always get is “What should my monthly budget be?” and “How do I know if my Adwords campaign is profitable?”.  Here is the conversation we have with clients to help break it down:

 

“First we need to find out what your estimated average CPC’s (Cost Per Click) will be.  Let’s take a look at the Adwords Keyword Planner.  Ok, I see that it looks like your CPC’s will be coming in at around $8.00.  To get 100 clicks per month, you will need to spend $800. Out of those 100 clicks, how many of those people will either call your business, fill out a contact form or stop in to your business (if you are retail)?  The ratio between clicks and “leads” or “conversions” is called your conversion rate. Some campaign conversion rates are around 1-2%, some can get as high as 20-30%. For easy math, let’s say your conversion rate is 10%.  So, out of every 100 clicks, you will get 10 leads. Out of those 10 leads, how many of those people will turn into customers? This is called your “close rate”. Let’s say you think you can turn 4 out of 10 leads into a client or customer.  On average, what is the “lifetime value” of a new client or customer? Let’s say that number is $600. Here is the equation: (100 clicks X 10% conversion rate) = 10 leads. 10 leads X 40% close rate = 4 New clients. 4 clients X $600 = $2,400.  Is $2,400 more or less than your ad spend and management fee?

Obviously the above are estimates, but you can see how the process works.  Give us a call and we can walk through this conversation using our best estimates for your business.