How much should you spend on paid ads? Well, that depends on what platform you’re using, your target market and a host of other things.

LinkedIn for example, provides an excellent return on B2B ads for the most part, while Google still reigns supreme for B2C.

The top three paid ad spots on Google’s search engine results page (SERPs), get 41% of the clicks. Even the best SEO techniques will only expose you to 59% of the viewing audience, and Google’s knowledge graph and infoboxes are quickly cutting into that as well.

Marketing professionals across the board agree that pay-per-click advertising works. The hard part is getting set up with a solid PPC plan to serve as your foundation.

We need to know how much to spend when to spend it, where to spend it, and how to spend it correctly.
These are tough calls to make, especially if you’re new to paid advertising.

The paid platforms can be complicated and confusing. And the analytics and metrics they serve you can be overwhelming. What do you do with all these options, data, and metrics?

The secret to answering these questions and be successful is to avoid the guessing game and instead use information and cold hard data. Which is what we’ll be doing here.

First, let’s have a quick lesson in PPC. You probably already know it. Nevertheless, it’s included for the newbies (and a refresher for the pros).

How PPC works

Search engines, including Google, allow you to purchase ad views on their platforms on a pay-per-click pricing model. That is, for a price, search engines allow you place ads on their platforms. The actual price is determined by the number of searches and ads running for a particular keyword or phrase.

A popular search term, such as “phones” for example, can cost up to $5 per click to advertise, meaning you’ll have to pay Google $5 for every lead it gets to your website by displaying your ad at the top of the search results for the terms you bid on.

To reduce costs, (and also improve conversions) you can target specific demographics, affinity groups, geographical locations, and mobile devices.

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Search engines aren’t the only platforms for paid ads. Social networks and video ads are rising in popularity. So PPC also applies to those networks.

Determining CAC and LTV

CPC isn’t the same as your customer acquisition cost (CAC). What ultimately determines your CAC is your website’s conversion rate.

Going back to our phones examples, if each web visitor costs $5 to obtain and you’re only converting 50% of your visitors, that means your CAC is $5 x2 = $10. That means the customer acquisition cost for your PPC campaign is actually double your CPC.

This doesn’t take into account the rest of the marketing budget either, which also includes radio, print, television, social media, billboard, event marketing, and other customer outreach initiatives.

The CAC is calculated by dividing all marketing expenses by the number of customers acquired in the same period. For example, if a company spent a million naira on marketing in a year and acquired 100,000 customers as a result, its CAC is N10.00.

Balancing the CAC with the customer’s lifetime value (LTV) is how you create a successful business model.
So long as the LTV is larger than the CAC, your marketing efforts are working, and you have a sustainable business model. When the CAC rises above the LTV, you’re in trouble.

To calculate the LTV of a customer, you need to know how much each customer spends on an average purchase, how many purchases the average customer makes in a certain time period (week/month/year), and how long the average customer sticks around, hence the “lifetime value” term. Profit margins, discounts, customer retention rate, and gross margins are all factored into the final formula, which you can find here.

Here’s something important you should note. If you want to make sure you double your money you invest in ads, don’t buy general keywords. Extend your keyword searches by using associated keywords instead.

Extending keyword searches

There are millions of searches for phones every month, but you have no idea what type of phone they are looking for. It’s still worthwhile to advertise on a single keyword, but with such a relatively high CPC, you shouldn’t pour all your budget into that one highly competitive keyword.

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“new phone,” “4-inch screen phone,” “cheap phones,” and “used phones,” all have different prices for different search volumes. Spreading your budget across all these keyword phrases increases the chances that your ad is seen by people searching the web in different ways.

At this point, your overall CPC will be determined by the cost and frequency of each individual search term. You can afford to buy some traffic for “phone” and “new phones” so long as it’s balanced out with “cheap phones,” and “4-inch screen phone.”

You now have a potential pool of customers that’s double the size of your original pool if you were just going for generic keywords, which maximizes the reach of your ads.

Keep drilling down in your keyword research (as deep as five- and seven-word long-tail searches) for the best results. For example, phrases such as “big screen phones with one year warranty” or “cheapest 2015 Samsung phones with Android 6.0” are great ways to target a specific type of buyers.

The longer a search term, the more specific information a customer is typically looking for. While searches may be lower, bids will also be lower, allowing you to obtain some customers for below a dollar and others for $5 while still maintaining a low CAC.

Portioning budgets for each keyword is critical as this is one of two places where smart marketers maximize their ROI. The other is targeting specific customers using remarketing lists for search ads.

Targeting the right customers

A few years ago, Google moved beyond focusing on just keyword searches to looking at contextual information about customers.

The most valuable result of this change was RLSA – remarketing lists for search ads.

RLSA lets you target customers who have visited your website previously, which is pretty useful because bounce rates are high on websites. Just because a customer leaves your website without taking the desired action, doesn’t mean they’re not interested. Shoppers may visit a site up to 9 times before purchasing, so the more they visit, the further down the conversion funnel they may be.

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On the average, for every 1,000 visitors to your website, only 20 inquiries are received (about 0.02%). It’s not smart wasting ad money on those 20 when you should be focusing on converting the other 980.

Using RLSA, you can optimize bids to increase your ROI. By adding the remarketing tag to your website, you allow Google to further segment your visitors and hyperfocus your PPC ad campaigns.

Of course, the downside to these PPC ad platforms is you can’t determine who is already a paying customer. Have you ever noticed yourself still receiving ads for products and services even after you’ve purchased them? That’s advertiser’s money being wasted.

Please, also be wary of disgruntled customers and employees who may purposefully click your ads without making a purchase. (Seriously, people do this in order to drive up the cost of your ad spend.)

Segmenting and targeting ads in any way is an essential step toward optimizing them and getting the most bang for your marketing buck.

Conclusion

PPC is still one of the most popular methods of advertising, with over $500 billion spent annually on it.

It can be exciting to envision massive ROI and all the extra sales you’ll be able to make by simply toggling some ads and letting them run. However, it’s important to run experiments and do research to know what keywords and searches have the best conversions for your site.

Targeting these searches with ads moves you to the top of the search results, giving you optimal visibility.
Beyond just search terms, it’s also important to target customers at specific points in the sales funnel.

The actual cost of your PPC campaign isn’t as important as the ratio of CAC to LTV. It’s okay to spend a little more if you are marketing a more expensive product or a company with higher retention rates.

And as long as your overall marketing budget doesn’t outweigh the lifetime ROI from customers, you’ve built a sustainable business model.