Business Insights

Budgeting For Search Engine Advertising

Hamish Braddick
Published on

Please Note: This section talks extensively about website and business ‘metrics’. If you do not understand metrics like ‘visitors’, ‘conversion rate’, ’average sale’, ‘revenue’, ‘margin’ and ‘profit’, then you need to read our free booklet titled– 'Website Fundamentals - How to Generate Amazing Results Online' before working through the remainder of this document. This section extensively utilises information we provide in the booklet, ‘Website Fundamentals - How to Generate Amazing Results Online’.

One of the first things you need to do before venturing into the world of search engine advertising is to establish your advertising budget. In order to successfully establish an advertising budget you need to work out exactly how much you can afford to spend on attracting visitors to your website. How much can you pay for each visitor or each click while you’re making money? This is called your Maximum Cost-Per-Click (CPC) or ‘Bid Cap’.

Calculating the max CPC/bid cap will vary depending on whether your website sells products or services directly online (ecommerce) or merely looks to generate an enquiry (E-Profile).

To work out your max CPC/bid cap for an ecommerce website, perform the following calculation:

Average Sale $100
Margin 30%
= =
Gross Profit $30
Conversion Rate (Visitors)  5%
= =
Max CPC / Bid Cap $1.50

To work the max CPC/bid cap on an Profile website, you perform a slightly more complicated calculation:

Average Sale  $100
X  X
Margin  30%
=  =
 Gross Profit  $30
 X  X
Conversion Rate (Enquiries) 25%
 X  X
 Conversion Rate (Visitors) 5%
 =  =
 Max CPC / Bid Cap $0.375 

This shows your absolute max CPC/bid cap. We strongly suggest that you set a bid cap a little below what is shown by these calculations, as they do not take into account the fixed overheads of your business.

Your max CPC/bid cap is sometimes not an easy thing to work out– especially if you are venturing into the online world for the first time. This is because it is hard to know exactly what ‘visitor conversion rate’ your website will achieve if you haven’t had several months of testing and measuring it.

If your website is really new, we suggest you work with a visitor conversion rate of 3%. Website conversion rates across the world are currently averaging between 2-3%. Hopefully, as you measure your website over a number of months, you will find that your conversion rate is much higher than the standard.

Now that you know your max CPC/bid cap, you need to work out your total search engine budget. Most search engine advertising providers will allow you to set an advertising budget, so that in the event you receive many more clicks than you anticipated, you will not end up with a hefty bill.

If you have worked-out your calculations correctly, and you pay for advertising at a rate significantly below your bid cap, you should see a significant return on the money that you have invested.

The final thing you need to decide is exactly how much search engine advertising you can afford to bankroll. “What!?”, we hear you say, “I thought you just said that providing we do our calculations well, we will make returns on search engine advertising– so what’s the risk?”

This is true, but like all advertising projects you need to be aware that there will be a period of time before you see a return on that advertising investment. You need to understand your sales cycle and product or delivery cycle.
Let’s take a look at an example:
You pay $50 a day, everyday, for search engine advertising. Based on your calculations you know that the advertising is going to generate approximately $100 worth of profit everyday. Now imagine that it takes you on average of 10 weeks for you to deliver the product or service that you provide to your customer, and receive payment. This means that you will need to pay $3500 ($50 X 70 days) before you will start to see the profits resulting from your advertising. You need to be able to bankroll $3500 worth of advertising before you will see the results of that advertising making a positive affect on your bank balance.

So let’s imagine that we have $2000 that we can dedicate to search engine advertising, and that it takes us four weeks to deliver the product or service to our customer, and receive payment. This means that our search engine, advertising budget is $66.70 per day ($2000 / 30).

This can be a little confusing when you are looking at these concepts for the first time. Don’t worry … soon you will be able to do all this in your sleep!
If you need some help, talk with the Support Team.

Remember– the key figures you need to know before starting a search engine, advertising campaign are:

  • Max CPC / bid cap
  • Daily search engine advertising budget.
Hamish Braddick
Published on

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