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One of the top questions I hear from clients and prospects is, “How much should our budget be for pay-per-click advertising?”

The answer to identifying the appropriate PPC advertising budget depends on projections, assumptions and math. In this article, I’ll dive into a few of the formulas we use to help companies determine how much to spend on online advertising.

The core purpose of running paid ads is to achieve a business objective. We use a lead generation equation to help us reach that objective. The equations are simple:

(Revenue / Sales Period) / Average Sale = Number of Customers

Number of Customers / Conversion Rate = Number of Leads

Number of Leads / Conversion Rate on Traffic = Amount of Traffic

Let’s fill in these equations with some real numbers. Let’s say there is a revenue goal of \$1 million. There are 12 sales periods per year (recurring monthly revenue) and the average sale per customer is \$1,000.

(\$1 million / 12) / \$1,000 = 83.33 customers

To get to \$1 million in revenue, you’ll need about 84 customers. Now, let’s assume your sales team closes one out of every five leads, or 20%.

83.33 customers / 20% = 416.66 leads

Assuming a 20% close rate, you’ll need about 417 leads per year. Let’s assume 5% of your paid advertising traffic actually fills out a contact form to qualify as a lead.

416.66 leads / 5% conversion rate = 8,333.33 visits

With a 5% contact form conversion rate, you’ll need about 8,334 website visits to generate 417 leads, which will translate into 84 customers, which will equate to \$1 million in revenue.

Of course, that’s if the numbers work out, which leads us to the next step in determining an advertising budget.

Existing Marketing Strategy

Paid advertising is only necessary if other marketing tactics fall short of achieving your revenue objective. Essentially, paid ads can help make up for the shortcomings of search engine optimization, email marketing, social media marketing and other forms of marketing meant to drive leads for your business.

Which marketing assets are currently driving results?

Taking into account how SEO, email, social and other marketing tactics are performing provides a more holistic marketing strategy. For example, if the strategies for SEO, email and social get you to 75% of your revenue objectives, then you’ll know paid advertising needs to account for the remaining 25%. Instead of driving \$1 million in revenue, paid advertising can focus on driving \$250,000 of revenue.

Competitor Analysis

What are your competitors spending on paid ads? What are their targeted keywords?

You can spy on your competitor’s paid advertising activity by using a service like SpyFu or SEMRush. Simply plug in your competitor’s website URL and these services will estimate their Google AdWords activity – including their estimated monthly spend, targeted keywords and ads.

The key here is to analyze at least five competitors to get a good baseline for the average spend in your industry. Make a list of three known competitors. Then, include two competitors who are bidding on your target keyword.

Let’s say competitor one is spending \$3,000 per month, competitor two is spending \$4,500, competitor three spends \$0, competitor four spends \$10,000, and competitor five spends \$2,000.

Typically we’ll throw out the high and low to average out the remaining three competitors and get a ballpark estimate of what a company should roughly spend on Google AdWords to be competitive in their respective industry. In the example above, averaging out competitor spend estimates a monthly budget of \$3,166 would be enough to be competitive.

But would it really, given your business objectives of \$1 million in revenue? Let’s do some keyword research to see if search volumes will achieve your revenue results.