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WMQA: How Much Should I Spend On PPC Advertising?

Dear WMQA —

I have a simple question. What should I be looking for in respects to ROI on keyword spends? I know some retailers use 3.5x. What’s the range? See, simple!

Thanks –

Green

Dear Green –

Because your site is direct response, you’re taking the right approach thinking ratios, rather than absolute budgets.

Your target ad spend % depends on your margin.

One decent rule of thumb:

Target A/S = (1 – cogs – variable) / 2

So, a retailer with 65% COGS and 5% variable order costs (credit card discount, pick-pack-ship costs, phone support, etc) might spend

(1-.65 -.05)/2 = 15%

of net sales on advertising. In your lingo, this means each ad dollar has to bring in

1/.15 = $6.67

in sales.

Gift and clothing retailers typically spend at the 30% A/S level. Electronics and tech are down around 8% or 10%. Again, its all about the margin.

Where’d that formula come from?

See this post — Little Known Way To Determine How Much To Advertise — for the ideas behind and the limitations of that rule-of-thumb.

That post also gives a nifty spreadsheet to help out with the math.

Cheers –

WMQA

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