How Much Should You Spend on Paid Ads? Here’s My Data-Driven Formula

A few years back when I first started NeilPatel.com, I spent $66,372.09 on paid advertising through LinkedIn, Google AdWords, Retargeter, Perfect Audience, and StumbleUpon ads.

You might say that’s a lot of money.

It was. But I learned some valuable lessons.

I learned which platforms and networks work best for targeting which audiences with which ads.

Some of my takeaways?

LinkedIn, for example, provided an excellent return on B2B ads, while Google still reigned supreme for B2C. StumbleUpon’s conversion rate for paid products was woefully low.

The top three paid ad spots on Google’s SERPs, for example, 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.

Those are tough calls to make, especially if you’re a paid advertising newbie. The paid platforms can be complicated and confusing. What do you do with all these options, data, and metrics?

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To answer these questions and be successful, instead of playing a guessing game, we need information and cold hard data.

How PPC works

First, a quick lesson in PPC, which you probably already know. I’m including it for the newbs (and a refresher for the pros–it never hurts!).

Google and other search engines allow you to purchase ad views on their platforms on a pay-per-click pricing model. 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 “insurance,” can cost $59 per click to advertise, meaning you’ll have to pay Google $59 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.

This isn’t your typical example, however, as “insurance” is actually the most expensive PPC keyword by a large margin.

Download this short pdf to determine how much should you spend on paid ads.

These costs can be mitigated (and conversions improved) by targeting specific demographics, affinity groups, geographic locations, and mobile devices, which are generating more and more search traffic.

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Of course, search engines aren’t the only platforms for paid ads. Social networks and video ads are rising in popularity, as explained in this Search Engine Land article by Pauline Jakober.

Video ads in search results aren’t a reality yet, but with Alphabet owning both Google, the world’s largest search engine, and YouTube, the world’s largest video platform, it’s only a matter of time.

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.

If each web visitor costs $59 to obtain and you’re only converting 50% of your visitors, the customer acquisition cost for your PPC campaign is actually double your CPC, or $118 in the example of insurance.

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 $10,000 on marketing in a year and acquired 10,000 customers as a result, its CAC is $1.00.

Balancing the CAC with the customer’s lifetime value (LTV) is how you create a successful business model.

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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.

Because understanding this concept is critical, here’s a graphic to help make the lesson sink in:

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To calculate the LTV of a customer, you need to know how much each customer spends in an average purchase, how many purchases the average customer makes in a certain time period (day/week/month/year), and how long the average customer sticks around.

Profit margins, discounts, customer retention rate, and gross margins are all factored in to the final formula, which you can find here.

In the case of an insurance company, if an average policy costs $1,000 ($100 is profit), and the average customer is retained for 3 years, you’re making $300 for every $118 spent on your PPC campaign, which is close to the actual average.

Businesses make an average of $3 for every $1.60 they spend on AdWords.

I’m sure you want to double your money. We all do. But if everyone is advertising for the keyword “insurance,” they’re missing quite a bit of traffic. You need to check associated keywords.

Extending keyword searches

There are millions of searches for insurance every month, but you have no idea whether those people are looking for medical, life, business, home, phone, or auto insurance.

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It’s still worthwhile to advertise on a single keyword, but with such a high CPC, you shouldn’t pour all your budget into that one highly competitive keyword.

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“Car Insurance,” “insurance quotes,” “auto insurance,” “compare car insurance,” and “car insurance quotes” 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 “insurance” and “auto insurance” so long as it’s balanced out with “compare car insurance,” “insurance quotes,” and “car insurance quotes.”

You now have a potential pool of customers that’s three times the size of your original pool, which maximizes the reach of your ads.

Continue this research into five- and seven-word long-tail searches for the best results. For example, phrases such as “Best car insurance company in Arizona” or “Cheapest car insurance for 2005 Ford Mustang” are great ways to target specific regions or car owners.

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 $5 and others for $50 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 from this change was RLSA–remarketing lists for search ads.

RLSA lets you target customers who have visited your website previously.

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Bounce rates are high on websites, but just because a customer leaves doesn’t mean they’re not interested. Shoppers may visit a site 9 times before purchasing, so the more they visit, the further down the conversion funnel they may be.

Take a look at this sales funnel:

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For every 5,000 visitors, only 100 inquiries are received, so why waste ad money on those 100 when you should be focusing on converting the other 4,900?

Using RLSA, you can optimize bids to increase your ROI. Tirendo Tires, for example, increased sales by 22% and conversions by 163% simply by raising their bids on previous homepage visitors.

World Travel Holdings increased ROI by 30% by using RLSA to target previous site visitors for broad search terms (like “insurance” in the example above).

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. I constantly receive ads for products and services I’ve already purchased, which I know is wasting the advertiser’s money.

You also have to 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.

Before spending any money on a campaign, however, it’s important to understand 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.

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

How much are you spending on paid search? Are you getting a solid ROI?

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44 thoughts on “How Much Should You Spend on Paid Ads? Here’s My Data-Driven Formula”

  1. Selvakumar says:



    Hello neil,
    A good guide at right time. I am learning new terms day by day from your article. I have ine question. In google adwords i setup an ad which can be shown on my selected google partner website. I set only impression ads. Google shows me which are all the site the ad is running and placement of the add toom but if can track and see my ad myself on the site, it would be good for me. Is there any way to see my ad running on those sites

  2. Luke Guy says:



    This method is what’s missing for most bloggers. In order to be a successful business model we muse know all the metrics. I do SEO and lover free traffic. However, ads is a must also and is a better way to track conversions.

  3. Neil Patel says:



    Right a lot of bloggers feel they’ve got a grasp on everything except ppc etc

  4. Linda Jordan says:



    Neil as always reading your article is eye opening and I saw the video wave come for sure beginning with fb ads. I don’t use google adwords, I have a team for it. But dont use it yet. But fb ads I did for some clients and in the past with $40 we could generate a good number of clients. Since then the algorithm mustve changed because now it seems that $200 is a good ad spend number. Can you do an article on facebook advertising analysis seeing what the minimum adspend would be based on any industry and what tips increase conversions? I know that ads leading to a lead capture page offering something free or cheap work for example. Anything else? I value and appreciate all that you do in the industry Neil. You’re the best! Thank you!

  5. Alex says:



    Very nice Neil. I think Google is trying to reduce the importance of SEO by making their paid ads more prominent in order to increase their revenue from these ads, so it’s well worth learning how to use Google Adwords effectively.
    I hear we’ll soon be seeing paid ads in the map pack too…

  6. Neil Patel says:



    Awesome! Glad you’re loving the course

  7. pascal says:



    hello Neil, as well as other readers. I have spent considerable time and effort and some money trying to make my blog get traffic. So far, i have not seen any noticeable traffic on it. I do not want to be discouraged but i want to keep working on it. however, i think the time is right to take on a technical partner who will be more grounded in SEO and all that kind of stuff. I really wish you could give me advise on this as im this close to shutting down.
    thanks.
    http://www.hoomadeit.com

  8. Fabricio says:



    Hello, you’re one of the billions of sites that talks about marketing and you haven’t made any company successful. Why not writing about anything that you really know the business?
    My point is, you have articles about double your sales and you can’t do it with your own blog. Or explode your traffic and you can’t do it with your blog. So you have no credibility.
    Write about anything you really know about and you will succeed.
    Good luck!

  9. Vikash Sharma says:



    Hi Neil,
    This is such an awesome article. Luckily, I got this at a right time. Actually, I am planning to buy paid adevrtisement for my new venture http://www.housebuild.in but was not sure where to start with and how much should I spent initially. But after reading this article I have got some idea.
    Thank you for writing such a detailed and useful article

  10. Neil Patel says:



    Glad I could help Vikash. Let me know if you have other questions

  11. Markus Fernlund says:



    Hi Neil
    Thank you for a fantastic and enriching site.
    I sell my book (one book) on my own webpage.
    So far I go with Facebook add targeted to different groups.’I have tried Instagram but with bad results.
    What other channel is there to try for this kind of product?

  12. ADESANMI ADEDOTUN says:



    Hi Neil,
    I think am actually having hard time on get good ROI on my paid adverts. When I tried StumbleUpon, the result was extremely poor but couldn’t help. Thinking it was poor experience and I have to give up.
    And as it were, Facebook has been working perfectly for me over the last few months but have not tried Google Adwords for once. What do suggest about try Google Adword and forget about Facebook for the meanwhile, though it works for me

  13. Taylor Minaj says:



    Neil, I just loved this one….Thats 100% true,

  14. Bil Gaines says:



    Hey Neil, thanks for this post.
    Question — you mentioned not being able to determine who is already a paying customer, isn’t there a way on most retargeting platforms to exclude customers who’ve reached a certain page? (I also get a lot of ads for things I literally just purchased, ESPECIALLY from Amazon on retargeting me on Facebook.)
    I know in most cases, once I’m done paying I go to a thank-you page. But sometimes the payments are made off the site I was visiting; smaller companies use third-party payment tools a lot. What are your thoughts on a solution there?

  15. Fabricio says:



    Facebook has such an easy way to do it, with pixels. Go to the Advertising console and you’ll see it. You can design very complex ways of showing and ad to certain people based on certain actions.

  16. Eric says:



    Interesting !
    I think you can advertise video on facebook which still counts as pay per click
    What do you think?

  17. James says:



    Very Informative article, I must say you have provided handy information that how we spend our money carefully to generate more leads…

  18. Stefaan says:



    Thanks Neil, I love that you keep sharing your insights this way. And manage to keep up the actual quality and value over the years. Somehow I always end up back on this blog.
    So here is some of my insights that correlate with this article.
    For a construction company based in Belgium for residential homes(B2C). Our annual digital marketing budget for lead acquisition(2016) is spent on Adwords, Facebook, Bing/Yahoo, Youtube & Instagram.
    When we look at paid ads, Adwords Search is the absolute king when it comes to direct lead-gen(remarketing excluded): about 77% of direct leads with a low cpl of 20EUR.
    For contruction in industrial buildings (B2B). Adwords seems to be king as well: 93% of paid qualified leads. The only other campaigns successful here were indeed LinkedIn ads, responsible for 6% of leads, but a lower cost-per-qualified-lead.
    Any new media you have got your eyes on for construction based companies? Both B2C & B2B?

  19. Mark Wills says:



    Thank you Neil! I’m getting a ton of organic and direct traffic on my site http://www.loansigningsystem.com (relatively given I’m only a couple months old). I teach people how to make $75-$200 per appointment as a notary public loan signing agent. I’m starting to do more paid advertising and I’m glad you shared your knowledge!
    Thanks Neil!
    Mark

  20. Vivek Kumar says:



    Neil,
    I have two websites both having certain common products/services. The older one gets 20X traffic than the newer one. But, newer one is a better built website with lots of additional features and visitors data. Is it possible for me to use the remarketing data of older website for promotion of my new website since I have the control on both the websites?

  21. manju rai says:



    Great post Neil! I always take high bounce rate as a critical problem for a website, but never thought about it in another point of view that means it shows how many people come to visit our website. You are absolutely right Neil because at the end we all are human. we analyze everything 10 times before buying it. Its all about sales funnel. Thanks for the Post!

  22. uthman Saheed says:



    I have read a lot of articles about ads on various platform, but honestly, thiss is exceptional with a lot of statistics and new terminology.
    Though, I have never invested on any paid ads other than facebook ads… and the experience has been mixed.
    I’m a follower of Nail Patel on facebook, but I have never see your post unless the one you paid for. Does it means facebook page is now has useless as not having it if you don’t have a budget for it?

  23. Sylvanus says:



    I started out with google Adwords and spent well above $1,000 before I got to know that I had to sit down and ask myself how much have I really made. But just like you Neil, it was a good experience (expensive though). I was just excited that real people could reach out to me and make enquiries about my products and services. I never thought of ROI.
    But now, I’m a lot wiser. It all starts with keyword research as you pointed. The long-tailed keyword, the better especially when it has to do with demographics and people that are really willing to pay (confirmed commercial intent) for your products and services.
    I also used FB Ads and found out that I got more volume of traffic from that platform than buying customers. My buying customers came mostly from Adwords.
    The strategy I hope to adopt for that downstream traffic is long term marketing via email & SMS.
    My GREATEST LESSON hear is the graphical clarity you put on Lifetime Value of a Customer, LTV, as against Customer Aquisition Cost, CAC.
    Thank you so much Neil, you rock!

  24. Mansoor Ahmed says:



    Hello Neil,
    You really have spent a lot of money to test and it is really valuable to learn from your experience since I would not invest that much money myself to learn some lessons. You really have cleared many of my doubts regarding PPC, I will take care of them while setting my next campaign on Google Adwords and Facebook.
    Thanks again brother, I know that is bit small word in front of the work you have put into to come up with this valuable guide based on real-life experience.

  25. Andrew says:



    Hey Neil,
    Just as I prepare for my first PPC campaign you show up with a great article (yet again). These step by step insights are really helpful to us amateurs! The RLSA section was particularly useful, I wondered how that worked and also why ads might appear for products or services I’d also purchased. Your article also highlights how important a foundation keywords, and especially long tails are. I understand now their relevance to PPC.
    Thank you!

  26. arya reddy says:



    Thank u neil patel for your awesome research and helping us in our internet marketing and most of your strategies are unique and worked for me like a charm.

  27. saikiran says:



    thanks neil patel great post for spending money to drive traffic without wasting a penny

  28. Adam says:



    I don’t agree with targeting long tail keywords using Adwords. Google does not allow it and will simply state “Low search Volume ” and the advert will not be displayed.
    Remember Google wants everyone competing on the 1, 2 and 3 keywords to push up the prices for everyone else.
    That’s what shareholders ask for Neil is that not right?
    In the end the old saying “money goes to money cannot be more true here” eventually the small guy will get pushed out, very much like you see in the business parks up and down the UK and the shopping centers.

  29. Stefaan says:



    Adam, you should always make sure your kw’s aren’t too generic. If they are, that’s when you can’t compete with the higher bidders.
    Long tail keywords, together with higher quality scores, because of optimized landing pages, make it possible for small businesses to compete.
    If it’s low search volume, it’s not a scheme from Google. Maybe you’re targeting a narrow niche with a small audience. Maybe you’re geo-targetting has too small of a radius. If that is the idea, you have to go more generic. But you can get an idea of this through the keyword planner.
    And even when you have to go more generic, most of the time, being in the 1-2nd spot isn’t ideal. Your return on investment will probably be better when you bid for the 4th spot.

  30. Richard Saling says:



    Indeed. Also having an extensive negative keyword list is crucial and checking the search query report about twice a week if possible, will really help lower cost per leads and raise click through rate.

  31. gurwinder singh says:



    Hy Neil
    Nice info you posted
    I definitely try your formula and comes here with results
    Thanks for this stuff
    Cheers,
    Gurwinder

  32. Pritesh says:



    As always Neil,
    I couldn’t have agreed more. In today’s content marketing world, one must really learn how much to spend in order to get most ROI.
    I love all the tips you shared above especially the idea of not spending all on a single keyword.
    Although I don’t quite agree with Longtail keywords targeting with Adwords as a well-written article targeting the keyword should help rank any site with low competition fairly easily.
    Thanks for sharing and do enjoy your week Neil.

  33. Jordan says:



    You are a genius! I was looking for a formula! Thank you!

  34. Richard Saling says:



    Great article. One challenge though. With longer tail keywords, they get less searches and those searches end up getting low quality scores, which hurts the overall Adwords account performance if you have too many terms with low quality scores. So recommending a person use 5+ word keyword searches is great advice for SEO, yet isn’t the greatest strategy for PPC. An alternative would be broad match modified term such as +auto +insurance for
    That phrase requires auto insurance to be part of the search query from a user AND allows a broad match to, for example – auto insurance for ford mustang.
    I have been doing PPC for 3 years and worked on the Google North America Agency Support Team before being recruited by another company. I also help businesses with Adwords on a freelance basis and using Adwords for my Real Estate Investing business. Now using these longer phrases within the ad copy, would be an excellent strategy, so have fun and be creative.

  35. Jamie says:



    Thanks Neil, I’ve wondered about StumbleUpon and how effective it would be. Interesting that you didn’t try Facebook.
    Cheers,
    Jamie

  36. Thoman says:



    I tried my hand at paid advertising with Adwords a while back, when retargeting wasn’t available. From the information you’ve provided it does sound like it could be worthwhile to look at investing some time to develop my skills in Adwords again.
    Would love to see more case studies on the types of businesses that have succeeded with this though.
    Web Designer,
    Thoman

  37. Krishna Rao says:



    Hi Neil, well-written article. Most of my small business customers compare the amount spent on PPC ads in a month versus the profit they made that month through the PPC ads to determine if the campaign is successful. LTV is a really good concept that needs to be explained to clients.
    Thanks

  38. Rizwan says:



    This is such great, informative information and I am going to try some of these to drive traffic without wasting a penny.

  39. Tzvi Harel says:



    Nice article but I thought you’ll present more details on each platform you’ve tested i.e. Retargeter, Perfect Audience etc. Nevertheless, great reminder to all of us about the CAC / LTV swing. For all readers here who want to try using video ads in their pay-per-click campaigns, I invite you to take Promo video maker for a spin. It’s 100% free to try and it can seriously help you boost your overall marketing efforts. Like Neil mentioned above, “Social networks and video ads are rising in popularity…”, so although I’m biased, I urge you all to consider allocating budgets toward video marketing. Don’t stay behind!

  40. sham says:



    Hi Neil,
    This is the first time I am hearing about the LTV. Just wondering to hear more such new things from you. Thanks for letting me to know your metrics.

  41. Gordon O'Connor says:



    In my opinion this method is what is missing for most bloggers, even me. If we want to be a successful business models we must know all the metrics. I do SEO and lover free traffic. However, ads is a must also and is a better way to track conversions.

  42. Shweta Sharma says:



    Thanks for the great article Neil. Once again your article helped us a lot. Your article work as a great support for us. Thanks for your experience and specially sharing it with us.

  43. Ben says:



    Enjoyed the article – quite a lot of content. Looking forward to adding some techniques into our PPC adventures!

  44. Himmat Chahal says:



    Hadn’t even considered the possibility of paid video ads.. I agree that it is inevitable. Nice article!

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