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Budgeting for Pay Per Click

By: Nick Guastella, Bruce Clay, Inc., June 2006

Search engine marketing has been growing at a fast pace, currently taking up 34 percent of the average online marketing budget. Search revenues totaled $5.75 billion in 2005 and are projected to reach $11 billion in 2010 (SEMPO).

Pay Per Click (PPC) search spending is increasing faster than other marketing channels online, accounting for over 80 percent of search marketing revenues last year. Search text ads generated over $4 billion last year and could double this year. It is no wonder that marketers look for guidance on budgeting.

Funding Your PPC Campaigns

It can be difficult to budget for PPC spending because pricing is based on keyword bids, which are constantly fluctuating. Normally, keyword prices increase over time, although a slight decrease in average keyword bid (3 percent) was reported for Q1 2006 vs. Q4 2005, due primarily to seasonal factors.

One strategy for funding PPC advertising is to shift ad spending from other marketing channels. This was a major strategy used for funding search marketing in 2004, when marketers began to recognize its value but did not have existing search budgets.

Alternatively, you might try estimating a budget by calculating the percentage of revenue derived from your online presence and then base your PPC budget on that percentage. Start with this baseline, increasing the spend incrementally as sales increase.

Google has a Budget Optimizer for AdWords, which is designed to help advertisers receive the highest number of clicks possible within a specified budget. (It does not help achieve positioning.) This might be useful for advertisers that consider cost per click (CPC), have monthly budgets or want to automate the CPC adjustment process. Google does not recommend this tool for measuring conversions or the value of ad click-throughs.

Using Web Analytics

It is important to use Web analytics technology to measure the effectiveness of your ads and to harvest data for campaign optimisation.

You can track your PPC campaigns to calculate your return on ad spend (ROAS) and marketing ROI, giving you a basis for increasing the PPC ad spend gradually. It is better to increase your ad spend based on ROI because it measures profits by individual keyword while ROAS measures revenue for the total account. Additionally, ROI is important for identifying keywords that are costing far more than the profits they generate.

To get the most out of a campaign, you need to change your listings over time, removing the under-performers and adding new listings. An important element of a successful PPC campaign is testing creative and executions.

Getting Management Buy-In

Establishing a budget for PPC requires buy-in by your top management. The best way to gain this commitment is to provide information on the effectiveness of PPC advertising and how it can increase conversions and profits. This shouldn't be hard to do, as PPC is accountable and is widely used by advertisers large and small. Research and case studies can help prove your point. If you can get one senior manager on your side, he or she can help you convert the others.

Another good way to generate buy-in is to estimate the lost-opportunity cost of not investing in PPC. Use a keyword research tool to uncover the number of searches for your company's strategic keyword phrases and then estimate the number of unique visitors and conversions that are being missed by not being listed at the top in the major search engine sponsored listings.

Once your PPC budget is established, the next step is to decide whether the campaigns will be managed in-house or by a search vendor.

Outsourcing PPC

Planning and executing a campaign is a complex task that requires research, creative and landing page development, testing and campaign optimisation, etc. PPC campaigns are dynamic rather than static. Once implemented, campaigns require constant monitoring and bid strategy revision.

The burden of monitoring multiple campaigns and revising bidding strategies can accelerate as your campaigns increase and mature because all campaigns require ongoing attention. Ultimately, it may not be feasible to manage your own PPC campaigns in terms of the time and resources required.

However, one of the advantages of doing it in-house is that running a campaign provides insight into customer behavior and the keywords used to find your site. You will also gain the insight and expertise needed to pick a good vendor once the job becomes unwieldy.

We believe it is worth hiring a PPC specialist to handle your PPC campaigns. Data from MarketingSherpa shows that PPC vendors and specialists are well informed and more aggressive with bidding strategies, resulting in more relevant clicks and higher conversions. If you are not investing in this expertise, you risk losing higher search-related revenues.