Many businesses struggle with figuring out how much money they should spend on advertising.
Some businesses don’t spend any money on advertising, other businesses spend too much.
Sure, the “free” advertising methods are great and if you’re generating enough money to make you and your business happy – then … good for you! Keep at it!
However, if you want to generate more sales, revenue, and profit … you’ll want to be sure that you’re spending your advertising dollars wisely.
- Related Course: How To Optimize Your Sales Funnel
How Much Should You Spend On PPC Advertising?
Believe it or not, figuring out how much money you should spend on your Pay Per Click (PPC) advertising campaigns is very simple.
Unfortunately, too many businesses don’t do the simple math to figure out how much they can and should spend on advertising. So, they wind up spending too much, or running away to cheaper, lower quality, sources of traffic.
You’ll need 3 numbers to calculate your PPC budget:
- How much gross profit you make per product/service sold ($)
- Gross Profit = Sale Price – Cost of Good Sold
- Profit you want to keep per sale ($)
- This is known as the Operating Profit
- The amount of money, from each sale, that you want in your pocket
- Conversely, what amount of gross profit you’re willing to spend on advertising to sell the product/service
- Note: Don’t forget, operating profit is taxable and may incur other expenses
- Conversion rate (%)
- For every 100 people who land on your sales page, X people make a purchase.
- X/100 = conversion rate.
- Related Tutorial: How to track conversion rates with Google Analytics
Bear with me a moment!
I know, those definitions may be a bit confusing at first sight, but after I run through a few examples, you’ll understand.
The PPC Formula
Here’s the formula the calculator follows … you can do your own math if you’d rather!
(Gross Profit – (Gross Profit * (Operating Profit / Gross Profit))) * Conversion Rate
The PPC Calculator
PPC Calculator Examples
Example 1 (Our Product)
We’re an eCommerce store that sells t-shirts.
We buy the t-shirts from the manufacturer for $2 per unit and sell them for $20 to our customers … resulting in an $18 gross profit.
We want to pocket $10 per shirt sold (Operating Profit).
We’ve determined Facebook Advertising traffic to our Sales Page converts at 5%.
Plug the numbers into the calculator …
Viola! We can comfortably spend $0.40 per click in order to pocket $10 per sale!
Example 2 (Affiliate Product)
We’re an affiliate for an online course that pays us $50 each time we refer someone to the course (Gross Profit).
We’ve decided we want to pocket at least half of that and spend the other half on advertising. So, $25 in operating profit is our goal.
Over time, we’ve figure out that the course’s sales page converts at around 3%, when traffic is sent via Google Adwords, for a few specific keywords.
Plug the numbers into the calculator …
Viola! We can comfortably spend $0.75 per click in order to pocket $25 per sale!
When you’re launching PPC campaigns, you may notice some people are paying ridiculous amounts of money per each click.
For example, the product for sale on the sales page is only $49, yet, people are bidding upwards of $15 per click! More than likely, their sales page isn’t converting above 30% to make it profitable.
So, how the heck are they able to bid so much and still turn a profit?!
Simple answer: The have a sales funnel.
That $49 product you see is just the front-end offer (sometimes called a tripwire). It’s what gets people in the door. Once they’re in the door, they go through upsell after upsell … which tend to have high conversion rates, thus making individuals worth way more than the original $49 they spend.
So, the average person may be worth about $200, making the $15 per click more practical, possible, and realistic.
Needless to say, if you find yourself surrounded by very expensive PPC ads, and you can’t compete … you need to spend some time building out and optimizing your sales funnel and sales pipelines.
Of course, if you need help with this … we’re here to help!
Ready For More?
Knowing how much you should spend per click is just one part of the equation.
Knowing how to decrease the cost and/or increase the profit is the other part …