Setting up a pay per click (PPC) budget and determining your cost per click (CPC) doesn’t have to be a major headache requiring a team of professional marketers to figure out, it's something anyone can do in a few simple steps. Though there’s much to say regarding the topic, the process boils down to the following:
- Define your advertising goal
- Determine the customers you'll need to reach your goal
- Determine your ad's click-through rate (CTR)
- Determine your cost per click (CPC)
- Determine your profitability requirements
Defining your advertising goals
There are generally 3-types of objectives in online advertising leading to sales conversions:
ROI-focused lead generation or customer acquisition - e.g. ‘We want to acquire 200 new customers within the next 30 days paying no more than $50 per new customer.’
Absolute lead generation or customer acquisition - e.g. ‘We want to acquire 200 new customers within the next 30 days regardless of the cost per new customer.’
Brand awareness - e.g. ‘We want to show 5 million impressions to potential customers over the next 30 days.
Since most businesses have a fixed advertising budget and the goal of Brand awareness is a more of a CPM calculation, we’ll focus on objective #1 and use that as our example.
Determine the traffic necessary to reach your goal
Traditionally, visitors entering your website through a paid advertisement convert 2.25% of the time. Based on that figure, our conversion rate range will be 2% – 2.5%.
Let’s see how much traffic you will need based on our conversion rate range in order to generate 200 new customers.
traffic required to meet your goal = 200 customers / 2% (low conversion rate)
traffic required to meet your goal = 10,000
traffic required to meet your goal = 200 customers / 2.5% (high conversion rate)
traffic required to meet your goal = 8,000
Based on the goal of 200 new customers and the expected conversion rate range, you will need traffic between 8,000 and 10,000 visitors to your website to reach your goal. We'll use an average of 9,000 visitors for this example. Remember, traffic is generated each time a user “clicks” on the display advertisement.
Determining the number of impressions and click-through-rate (CTR)
Now we will need to figure out the gross number of impressions (views) your advertisement must receive in order to reach the goal of 200-customer conversions. This key number is a function of the CTR, and it will vary depending on factors like the influencer channel your ad is posted on, however, we can also use a 2% click-through rate as a reasonable approximation (higher CTR rates will be beneficial).
traffic required to meet your goal = ad impressions served x click-through rate
Given what we know, the traffic, 9,000 visitors to your website = ad impressions served x 2% (click-through rate) so,
9,000 visitors / 0.02 CTR = 450,000 impressions
So, you will need to reach 450,000 viewers, on average, to get you to your goal of 200 new customers based on our statistical assumptions.
Determining your Cost Per Click
Advertisers on MashDrop.com can price their cost per click (CPC) directly. In order to remain competitive, it’s important to set a fair price that will attract and close the deal with social publishers. One way to determine a fair CPC is use the CPM model as a basis. Convert CPM to CPC using the formula:
CPC = CPM x (CTR x 1000)
based on a $10 CPM and 2% click-through rate;
CPC = $10 CPM (0.02 x 1000) CPC = $0.50 per click
Now, based upon the $10 CPM and 450,000 impressions needed to reach our goal, our budget should be at least:
450,000 views @ $10CPM = 450 x 10 = $4,500 budget
$4,500.00 would be our PPC budget and $0.50 per click would be our cost (CPC).
Determine your profitability requirements
We’ve determined how much traffic is required to meet your goal, and found out how much that traffic will cost on a per click basis. Now, we can tie all of that information together. Understanding the value of a customer or average order value will provide you with the ability to determine your return on ad spend (ROAS).
Let’s see how with our example assuming a unit sale of $50:
Average Order Value = $50
New Customers (goal for PPC) = 200
Expected Revenue = Average Order Value * New Customers
Expected Revenue = $50 * 200
Expected Revenue = $10,000
ROAS = (Revenue – Ad Spend) / Ad Spend
ROAS = ($10,000 – $4,500) / $4,500
ROAS = 120%
Put simply, a 120% ROAS means that for every dollar spent on advertising, $1.20 is generated in revenue.
Going beyond the PPC budget example, ROAS becomes an even more useful tool to guide how much you can spend and still grow revenue profitably.