How To Budget For a PPC Lead-Generation Campaign
Let’s talk about paying for subscribers.
I wrote an email subscription landing page for someone a couple of years back. He wanted to attract some subscribers for his mailing list so that when he was ready to launch his product, he’d have people waiting to buy.
So obviously I did a fantastic job.
Later, I emailed him because I like to know how my clients are getting on with their business pursuits. Everyone winning is a great thing, and if the numbers are good then I get to pass that on to future clients in order to demonstrate my prowess. If the numbers aren’t so great, then I’ll ask if they want me to take another look and see what’s going wrong.
Anyway, the client was happy with what I’d done but they hadn’t put it into much practice, because they didn’t want to drive traffic to the page with paid advertising.
They didn’t like the risk and the upfront cost.
This is pretty common and I understand it fully.
I don’t like paying for traffic to landing pages if I can help it. I much prefer sending it to a sales page because then it’s an uncomplicated “Is this traffic converting?” question that’s answered by simply looking at the figures.
If you want to learn PPC advertising, then I suggest you do that. Try e-commerce, product arbitrage or simply sending targeted people to an offer. Then tweak. Worry about more complicated stuff later.
Anyway, most entrepreneurs bulk at the risk of PPC. Long term, this isn’t great strategy because you’ll be outcompeted by people that are willing to take the risk.
The first way to eliminate risk is by understanding it.
So in this article, I’ll talk you through the basic economics of PPC advertising.
Costs Must Be Lower Than Profits
We’ll complicate things later in the article, but for now, let’s keep it simple.
You want and need to keep your costs of acquiring a paying customer below the amount of money you make from them.
You need the sale to be worth more than the cost of acquiring the customer. If your average lead (email subscriber) costs one dollar and you have a conversion rate of 1%, then you multiply the lead by the conversion might to get $100. This is the rate at which any average lead becomes a customer.
If you don’t make $100 per sale, then you are unlikely to make a profit. It is a bad idea. You will break even if things stay the same at best.
If, on the other hand, you get leads for $0.20, and your conversion rate is 5%, then a sale that nets you $100 puts you by far and away in the profit zone.
You work on the average because you don’t know whether any given email or lead is going to pan out. Over the course of the average though, you get a figure that will be at least somewhat accurate.
To put it simply:
The easy formula for lead generation costs:
Cost Per Lead x Conversion Rate Must Be Lower Than Initial Sale Price
Now we’ve made that simple, let’s make it more complicated.
PPC For Lifelong Customers
Some people, and I don’t recommend beginners even think about doing this, think about not just the initial sale, but the lifetime of the subscriber.
So if you pay $100 to get somebody who spends $100 with you, then you have broken even. This is not ideal, because what’s the point? You end up with zero.
However, think about some of these situations:
- You have a subscription model so that a person buys $100 a year.
- You have an upsell, so that a person who buys $100 now gets the opportunity to spend another hundred dollars on something else as soon as I bought.
- Or you have other products, so somebody who buys one of your products is likely to buy another one.
These things will mean that while you were only breaking even, or even making a loss, in the initial sale, you are also getting the additional money at a later date.
To add this into your calculations, you need one additional figure and that is the rate of retention.
So in other words, you need to know how many people will buy your additional products in the future.
This won’t be all of them and this is a key thing that you have to take into account. Not everybody who spends $100 with you is going to spend $200 with you. They might not like your product, they might be using their last remaining savings to buy your first product or life might just get in their way and give them different priorities.
That’s why you use the retention rate figure. If 10% of your customer is likely to buy a second product, then you can add this figure into the equations you made above.
This is again, an average.
To put this part simply:
Cost Per Lead x Conversion Rate Must Be Lower Than Initial Sale Price + (Average Value Of Additional Sale x Average Retention Rate)
Final Thoughts
To conclude, let’s summarise everything I’ve talked about:
The easy formula for lead generation costs:
Cost Per Lead x Conversion Rate Must Be Lower Than Initial Sale Price
This guarantees you’ll do better than break even on a campaign. It’s averaged out because some leads will not lead to sales and some leads will be significantly cheaper than average.
Then, to make it slightly more complex and take into account lead generation over the long term:
Cost Per Lead x Conversion Rate Must Be Lower Than Initial Sale Price + (Average Value Of Additional Sale x Average Retention Rate)
This ensures that even if you don’t break even on an initial lead generation campaign, you make the money back later. This isn’t something I like doing, and I don’t recommend taking this into account unless you have a long track record of sales in the campaign already.