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