How much should I spend on PPC Advertising?

“How much of my marketing budget should I allocate to Paid Search advertising?” This question must be answered by every business leader who sells or advertises products or services online. While each business is different, there are some principles that can be applied across most industries and business models.

The thread below describes how these principles applied to one subscriber – also a Paid Search Certification course student – for her online business.

Question from subscriber:

I used the [MEC] calculator to figure out my break even CPC – but the bigger question is – what % of my Marketing Budget should be allocated to PPC? Is there a formula to figure that out? Right now I’m spending 4k a month with Reach Local and that was a number that my CEO and I sort of just pulled from the air. Before we started using Reach Local, we were handling PPC in house with Google/Overture and they were spending about $3k. But no-one has ever analyzed what the right number really is. Let me know if there’s a formula or percentage or something that I should be working from.

Answer:

Presuming that your goal is profit maximization, you will want to allocate your marketing budget according to the channels that are the most profit intensive; that is, those with the greatest ROI. Best practice is to determine the ROI for each of your channels and focus most of your attention (and budget) on those with the highest ROI. So, if you know that one marketing channel is generating a 10% net product profit margin and a different channel is only producing a 5% margin, then you will want to focus as much of your budget on the first channel as it will sustain at that performance level. Then, allocate resources to other channels in descending order of performance.

Of course, until you’ve tested a given channel you cannot know how it will perform, so you will want to reserve some of your marketing budget and attention to seeking out and testing new methods and outlets.

That said, there is an additional practical consideration. For most companies, cash flow is a factor. Payment terms for competing channels and your own cash reserves and receivables profile can significantly influence the optimal allocation of marketing budget. If the PPC engines insist on daily reconciliation while you can get 30-days-net terms for an online newsletter ad, you might direct some money there, even with a lower ultimate ROI, because the payment won’t come due until after much of the cash arrives from sales it generates.

Thanks for your question.

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