Like anything else, there is a set of best practices/approaches for creating any marketing budget. Generally there is some sort of marketing plan that the budget is apart of, and generally you have some form of primary, secondary goals (i.e. – Brand Awareness, Transaction Volume Increase, Revenue Increase, Profitability Increase etc…).
There is however, one very important difference in the approach you should consider. The budget shouldn’t be a set dollar ($) amount. Remember, PPC marketing is something that should be constantly in motion. It’s easily measurable and because of this, it should be entirely based on results and it should increase with performance. We call it “Frequent RE-Budgeting“. Let’s dive into what I mean by that statement by showing you some examples from some of our own sites and data collected.
Note: This isn’t a post on HOW to build a proper PPC marketing strategy or how to execute on said strategy. This is strictly about how to budget for PPC in the world of eCommerce.
Budget for ROI by Measuring the Cost Per Transaction
For this example I’m going to use straight margin of sale as a measure of ROI. This is probably the most basic form of ROI for an eCommerce/retail site and is actually quite easy to get your head around it since Google Analytics takes care of most of it for you.
Like many online retailers, gross profit margin is something we watch closely. When determining how much to spend on PPC, this is where we start. Our thinking goes something like this:
1. We want to run a PPC campaign for a new brand of dog food we’re carrying.
2. This new brand of dog food has an average gross profit margin of 30%.
3. What is our target % of spending to acquire a $100 order on this new dog food?
4. 7-12% is what we usually gun for to acquire a new order.
5. Rough (simple) math is that we spend $7 to $12 on PPC ads to get a $100 order.
Now that we know what we’re willing to spend as an average to acquire orders with PPC, we can start building out our campaigns to achieve this…[Again, not covering how to setup PPC campaigns…fast forward to data collection and re-budgeting…]
Look at the below table. This is a snapshot from some real PPC campaigns we have running on one of our sites.
- Based on our initial budget, there is one campaign here that is not giving us the desired ROI.
- When we look at the campaigns with really high “Margin”, we look for ways to spend even more money on ads to drive up our revenue since our margin is very healthy. Theoretically, we’ll spend as much as we possibly can in any particular campaign if it’s got a margin of greater than 90+ %.
Budget for ROI by Measuring the Lifetime Value of a Customer (LTV)
Our preferred method is not to budget based on a cost per transaction basis (see above) but rather to look at the average total value of a customer for a rolling 12 month period. This requires a slightly different toolset than straight Google Analytics since GA doesn’t actually track individual customer profiles against transactions / revenue.
For this metric, we actually query our data directly to get the average revenue per customer over a 12 month rolling period.
If we’re delivering an amazing customer experience, we will get a % of customers who will repeat purchase with us after their initial buy. With this in mind, acquiring the initial transaction isn’t really what is most valuable, it’s actually acquiring the customer.
I won’t go into the math behind lifetime value of a customer as there are too many variations/methods to calculate this for every business (depends on your model).
Budget for Brand Building
Last, and least measurable, is building your budget around building your brand and not by measuring it against revenue. This is one I always have a hard time stomaching as it’s very difficult to truly measure the return on a dollar.
This is rare in our world (ecommerce) but not totally unheard of. Sometimes it makes complete sense to spend money on acquiring eyeballs for secondary conversions like email sign-up or contests. Sometimes it makes sense to simply acquire the eyeballs for brand awareness and show those users that you are worth revisiting in hopes they will convert to customers later.
My advice to anyone going down this path. Figure out key metrics, even if they are hard to track. What gets measured gets return.