- April 3, 2020
- Digital Marketing
What You Can’t Afford Not to Know about Goal Based Budget Setting
If you were investing in your business a lot of time and resources but didn’t know if it was working, would you keep throwing resources at it? Probably not, and neither will your clients. Therefore, you must define what you are trying to achieve, design a strategy to make it, and then measure your results to share with your clients.
Today, we will share a method you can use to define what you are trying to achieve with formulas for practical Goal-Based Budget Setting. This process will help your clients see how you intend to use their campaign budget to increase profitability and market share—and you to see how to improve your operating budgets.
The Basic Formula for Search Campaign Budgeting is This:
It is essential from the start to do two things. First, you need to establish the goals that are important to your client and possible to measure. Next, you need to determine their average net profitability per successful conversion. Sometimes, this exercise is also called calculating Customer Lifetime Value.
How to Establish Your Customer’s Goal
- Monthly Goal: This goal is the Desired Number of Conversions your client wants to generate monthly.
- Customer Lifetime Value: This number is the amount of net profit generated by each conversion for the time the customer is active on average, which we use to determine the Net Profit Per Goal.
To determine your clients estimated Monthly Net Profit based on the Desired Number of Conversions, you multiply the Desired Number of Conversions by the Net Profit Per Goal to get the Estimated Monthly Net Profit.
(Desired Number of Conversions) x (Net Profit Per Goal)
= Estimated Monthly Net Profit
How to Define Required Traffic
Now you know what Estimated Monthly Net Profit your client wants to generate. Working backward from there, you can define the required traffic you need to create to facilitate that goal.
Start by defining your terms:
- Site Conversion Rate: The default average is 3%
- Adjusted Site Conversion Rate: (Optional) If your client uses a lead-based system, find out their close rate for the business.
- Close Rate Percentage: The number of leads your client converts to business. For example, if your client gets ten leads and generates five customers from those ten leads, the close rate is 50%.
- Now you can determine your Adjusted Site Conversion Rate. Take the Site Conversion Rate and multiply it by the Close Rate percentage to get the Adjusted Site Conversion Rate; i.e., (Site Conversion Rate Percentage) x (Close Rate Percentage)=(Adjusted Site Conversion Rate)
- In our example here, the client’s close rate is 50%, which makes the Adjusted Site Conversion Rate 1.5%.
- If you choose the Adjusted Site Conversion Rate option, substitute this value for Site Conversion Rate of three percent in the following equation.
Now, you have the values you need to determine how much traffic your PPC campaign should generate monthly and daily. Use the values in the following formulas:
(Desired # of Conversions) / (Site Conversion Rate)
= Required Traffic Monthly Formula
(Desired # of Conversions / Site Conversion Rate) x 30.4*
=Required Traffic Daily Formula
* The average number of days in a calendar month.
These numbers are essential for the next step of the process, defining costs, and estimated budgets. First, we will determine the cost of traffic for your client’s preferred keywords and then the monthly and daily budgets.
How to Define the Cost of Traffic
For the next step, you should research the historical highs and lows of the cost per click (CPC) range for the main keywords your client targets. Once you have these numbers, the formula is simple.
(Historical Low Cost Per Click+ Historical High-Cost Per Click) / 2
=Estimated Average CPC
From here, you can determine the Recommended Budget Monthly and Daily. Use these simple formulas.
(Required Traffic Monthly) x (Estimated Average CPC)
= Recommendation Budget Monthly
(Recommended Budget Monthly) x 30.4
= Recommended Budget Daily
How to Determine the Cost Per Acquisition
An essential number to any business is their Cost Per Acquisition (CPA). You have all the data you need to determine this critical element for clients using a simple formula. However, these numbers are predicated on the fact that everything works as planned (estimated) above.
(Recommended Budget Monthly) / (Desired Number of Conversions)
= Cost Per Acquisition
Perhaps now more than ever before, the CPA for clients will be essential information for determining budgets. All businesses need to assess their ROI for every dollar they spend. By providing factual information backed by data and math, you can be the resource that helps them stay on track with budgeting in these unprecedented times. Best of all, you keep your business afloat at the same time.
Your goal in this exercise is to demonstrate for the client how you came to numbers for their PPC campaign’s budget. By assigning a value (read: return on investment or ROI) to your efforts, your client should feel more comfortable expanding their digital marketing efforts with your agency and increasing their ad spend.
A profitable advertising campaign is what everybody wants, albeit for different reasons. Your clients want to capitalize on the remaining available customers in the market to get a return on investment. You want to deliver those customers, so the client continues using your agency and increases their ad spend. And, let’s not forget, the more your client spends, the more you should make managing the account.
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