How To Calculate Paid Search Budgets

by Mike Hall on 11th February 2022

Search presents marketers with the opportunity to target users across all stages of their buying journey, from early-stage research right through to the point at which they are actively seeking to buy – it differs somewhat from the more disruptive channels with audience-based targeting such as Paid Social and Display in that we don’t have to speculate over the intent of the user… We can infer intent from their search query as opposed to relying on algorithms to determine their suitability as a prospective customer.

With this in mind, paid search allows us to confidently target those bottom-of-funnel users that are searching specifically for the product or service that we are looking to promote, and as such it can be used to reliably generate a steady, consistent flow of sales/leads for a set budget.

 

“… But how much budget do we need to allocate to our paid search
campaigns?”

 

This is a question that we are often asked, and the answer depends entirely on your objectives/goals – ultimately, the vast majority of advertisers are looking to generate sales/leads, so when working out how much budget you’ll need, it can be useful to consider whether you have a certain number of sales/leads that you are looking to generate.

The fundamental aspect of being able to calculate the required budget for your goals/objectives is data. The more historical data that you have available to you (Google Analytics, historical Google Ads campaigns, CRM funnel statistics etc), the more accurately you are able to forecast performance and establish what level of budget is likely to be appropriate.

Essentially what we need to know is the conversion rate for every step of the buying process, and in the case of lead generation campaigns, an average lifetime value of a new client (in the case of eCommerce, this could be an average order value). Depending on your business and the processes involved in generating sales, the required data might be:

  • Average CPC (how much you will need to pay for each click)
  • Click > Enquiry (website conversion rate)
  • Enquiry > Lead (what proportion of enquiries are leads?)
  • Lead > Opportunity (what proportion of leads turn into opportunities?)
  • Opportunity > Sale (what proportion of opportunities convert to sales?)
  • Average lifetime value of a new client

A Worked Example (B2B – Lead Generation)

You are looking to generate £100k of new business, and the average lifetime value of a new customer is £25k – you therefore need to generate 4 sales.

On average, your website converts at a rate of 5% – 1 in 4 of those enquiries end up being leads, of which 1 in 4 are considered “opportunities”, and then 1 in 4 opportunities end up converting.

If we work this backwards, for every sale you need to generate 4 opportunities, 16 leads, 64 enquiries – so in order to generate 4 sales you will need to generate 256 enquiries, and since your website has a 5% conversion rate (1 in 20 clicks ends up resulting in an enquiry), you need to generate 5,120 clicks.

You are anticipating an average CPC of £5 based on historical campaigns and Keyword Planner estimates, so your required budget will be £25,600.

 

How To Calculate Paid Search Budgets

 

As with any data analysis, the more you have, the more statistically significant it will be and the more confident you can be about your projected results – it is however worth bearing in mind that there are several factors that can affect the performance of your campaigns… You will need to assess the search opportunity – do sufficient users search for your products/services to allow you to generate the required number of clicks in the timeframe you’re looking to run the campaign over? If you have not targeted these keywords at this particular level before then will you need to bid more aggressively to ensure you secure the required number of clicks (this may see your CPCs rising)? Are there seasonal trends that you need to consider (perhaps you are using historical CPCs from a campaign you ran in December but this campaign will run in July)? Are you planning on making changes to the landing page that could affect the website conversion rate?

Nevertheless, the process above will help to give you an indication of the level of budget that you may need to put behind a campaign in order to achieve the desired results. It will also help to ensure that you consider all the variables that may affect the ultimate performance over time, and the levers that can be pulled if results aren’t going the way you had hoped.

If you are looking to generate more leads/sales for your business and would like to speak to one of our experts about how we can help,
give us a call! We also have an in-depth guide on generating B2B leads via digital marketing channels which is free to download.

 

How To Calculate Your Own Paid Search Budget Step By Step

    1. Decide on how much new business you want to bring in via paid search. In our worked example above this would be £100k.
    2. Work out the average lifetime value of your typical customer. If you only tend to sell to your customers once then this is nice and simple to calculate. If you have repeat customers you could find out their average order value and multiply this by the number of times they order. In our example, this was £25k.
    3. Divide the amount of new business you want to generate (from step 1) by the average lifetime value (from step 2). This gives you the number of sales you need to generate to reach your target. In our case, £100k new business divided by £25k average lifetime value tells us we need to make a total of 4 sales.
    4. The next step is to work out the conversion rate of your website. This can be calculated by looking at your click conversion rate of previous Google Ad campaigns you’ve run or looking at your goal completion rate in Google Analytics. If you don’t have access to this data there are other ways to give you a rough idea of your conversion rate. One way is to divide the number of enquiries you receive through your website and divide that by the total number of website visitors. For example, if there have been 50 contact form submissions in a given month and there were a total of 1,000 visitors to the website your conversion rate would be 5%.
    5. Next, you need to calculate how many enquiries actually turn into customers, as not everyone who gets in contact will be the right type of customer. In our worked example for our imaginary business, 1 in every 4 messages we receive are leads. Out of every 4 high-quality leads we get, 1 of those will become an “opportunity”. Out of every 4 opportunities, we create one of those will become a customer. By working backwards from what it takes to acquire a customer, we now know for each new customer we need to create 4 opportunities. For every 4 opportunities we need 16 leads. For every 16 leads we need 64 enquiries. To generate the 5 new sales we’re after we need to generate 256 enquiries.
    6. Now we know the total number of enquiries we need to generate (from step 5) and how well our website turns visitors into leads (step 4) we can work out how many clicks we need to generate from our ads. Since our website has a 5% conversion rate (1 in 20 clicks ends up resulting in an enquiry) we need to generate a total of 5,120 clicks from our ads.
    7. Next, we need to find out what our average CPC (cost per click) is going to be so we know what our total budget needs to be. You can use historical data from your Google Ads account to find out what the CPC of your previous campaigns has been. If this is your first campaign you can use the keyword planner tool to find out what the CPC will be for each of your keywords. In our example, the CPC is £5, which means we’re paying £5 every time someone clicks our ad. We also know the total number of clicks we need to generate the required enquiries is 5,120. Some simple maths tells us that to generate 5,120 clicks at £5 per click, our budget should be £25,600.

 

If you’re looking to grow your business via pay per click advertising then get in touch with one of our digital marketing experts.

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