“How much money should I spend on paid search?” As someone who runs a lot of paid search campaigns, I hear this question a lot. The answer isn’t the same for everyone, and finding it can take a little work.

Unlike most traditional offline advertising, it's not very difficult to tie our online investment back to its return. Because we can tie our advertising dollars back to leads generated online, we shouldn't ask how much money we should spend. We should ask how much revenue do we want to bring in. The following questions will help you find that answer.

Question #1: "How much new business am I looking to generate?"

Let’s say your goal is to generate $10,000 worth of new business in the next 2 months. Each new customer is worth $1,000. That means you need 10 new customers in the next 60 days to generate your goal of $10,000 in new business.

Question #2: "What is my internal close rate?"

Not every phone call from a prospect turns into a customer. But let's say you are able to convert 40% of prospect phone calls into a new customer. This means we'll need 25 phone calls to generate the 10 new customers necessary to earn $10,000 in new business.

Ok, so 25 phone calls. We need 25 phone calls. Where can we get 25 phone calls?

Question #3: "At what rate does my online traffic turn into phone calls."

A decent paid search campaign can turn 10% of visitors into phone calls. To generate 25 calls with a 10% call rate, I would need 250 new visitors to my site. 250 visitors at a 10% call rate will generate the 25 calls necessary to earn me 10 new customers worth an average of $1,000.

Question #4: "How much does each visitor cost me?"

The beauty of paid search advertising is being able to track the incremental cost associated with sending each new visitor to our site. This is determined by the cost-per-click - or the cost to us each time someone clicks on one of our paid search ads.

Cost-per-click can vary greatly, from as low as $.25 to over $10. The more valuable a customer, the higher you should expect your cost-per-click. For this exercise, let's assume an average cost-per-click (CPC) of $4.

We know from our math above that we need 250 visitors to generate the adequate number of new customers to hit our sales goal.

250 visitors at $4 cost-per-click means we need a budget of $1000 to hit our new business goal of $10,000.

What should your budget be? $1000.

Not every business will have this level of detail about their call and close rates. If you fall into that bucket, use some conservative estimates and refine as you go. For example, try using a 5% call rate and a 10% close rate. We’ll keep the $1,000 average value and $4 CPC for now.

$10,000 revenue goal =

$1,000 average customer value =

10 new customers required =

100 calls required =

2,000 visitors needed =

$8,000 budget.

In this scenario, it’s probably not worth investing in paid search marketing. Improving the rate at which your site turns visitors into callers, improving your internal close rate (by hiring a sales coach), and lowering your cost-per-click would all make this scenario more favorable.

Having this level of clarity achieves multiple outcomes. First and foremost, it helps you make better decisions upfront. If you knew going in that every $1 spent on marketing would only get you $1.25 in new sales, you wouldn’t waste your time. Secondly, it is much easier to find truly successful campaigns. Not only are you not wasting your time with campaigns destined to fail, you’ll know when you’ve found a winner.