If you are like most of my clients, you are confused about what your paid search advertising budget should be. I created a simple tool you can use to determine a profitable budget. A link to the free tool is provided at the end of this article. But first, let’s review some basic budget setting concepts.

How much can you afford to spend acquiring a new client and still be profitable?

Determining your budget for paid search (or any marketing campaign) should start with the question above. Oddly, many marketing professionals do not have answer to this question.

A general rule of thumb states that your marketing budget should be about 5% to 10% of the revenue generated from the campaign. If you sell widgets that cost $1,000, you should be able to spend approximately $50 – $100 to acquire a new customer and still remain profitable.

Don’t forget about lifetime value. If your widget or service is $1,000 per month and your average customers sticks around for two years, your numbers would be $24,000 in revenue ($1,000 x 24 Months = $24,000) and $1200 to $2400 (5% to 10% of $24,000) in customer acquisition cost.

How Many New Customers Do You Want?

As many as I can!!! Calm down for second—you have to think about capacity and reality. For now, just pick a number that would make you happy. Something along the lines of  “If my website currently generates 10 new customers each  month, I would like to double that number to 20 by adding paid search advertising.” Now you get the idea.

If you want to add 10 new customers each month and you have determined that you can spend $100 dollars per new customer acquired, you could set your monthly budget at $1000 (10 X $100 = $1000).

Does Your Budget Mesh with Reality?

Given the examples above, a $1,000 budget is a reasonable starting point. However, there are a few other items you need to check your paid search budget against to see if it really makes sense. 

For example, what if your website converts visitors to sales at 1%?  In order to generate 10 new customers you would need to drive 1000 visitors to your website each month from paid search. That means your $1000 budget must have an average cost per click of $1.00 or less. Is that how much keywords cost in your industry? Can you improve your website conversion rate to help make the math work? What about the labor cost of setting up and managing the paid search campaigns?

If this is sounding confusing, don’t worry. I made a nifty little pay per click budget calculator that you can download for FREE.

The calculator will walk you through the process and do the math automatically.