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Forecasting PPC baseline goals

This article is the fourth in our SMB PPC series to educate small businesses  about paid search and what they need to know to successfully start a paid search campaign. Forecasting and setting baseline targets for PPC campaigns will help set expectations for the performance of search campaigns. This article will explain some of the different metrics used in forecasting campaign performance and in calculating the maximum cost per acquisition for your PPC campaigns.


Paid search metrics

There are a lot of different metrics available to track, however not all metrics are created equal in terms of their importance to your businesses performance. In the previous article we discussed the goals by business type. Now that you have your goals set, it’s important to identify the metrics you want to track when setting goals for PPC—and to understand which metrics you should be tracking to help with forecasting as well as creating your baseline targets.
Before we dig into how to use different metrics to forecast your budget and campaign performance, let’s define some industry-standard acronyms:


Acquisition metrics

Estimated cost per click (CPC): The estimated cost of one ad click. The Bing Ads Keyword Planner can provide insight into estimated CPC rates.

Budgeted ad spend: The amount of your ad spend allocated for Paid Search campaigns.

Estimated clicks (traffic driven): Determined by multiplying the estimated cost per click by the allocated ad spend budget.


Conversion metrics

Estimated conversion rate: The value for how often a paid visitor will convert on a website. In Bing you can set-up conversion tracking with Universal Event Tracking (UET) and set-up your conversion goal event. The conversion rate is the number of visitors to your website that did the specific identified goal action on your website divided by the total number of website visitors. Looking at historical conversion rate metrics can help you set an estimated conversion rate.

Estimated transactions: Determined by multiplying the estimated paid traffic driven by the estimated conversion rate.  

Average order value (AOV): The estimated dollar value of an order on an e-commerce store.

Total transactional revenue: Determined by multiplying the estimated number of transactions by the average order value.

Estimated leads driven: Determined by multiplying the estimated clicks by the estimated conversion rate.

Estimated customer close rate: The rate of how often a lead becomes a paying customer.

Closed customers: Determined by multiplying leads driven by customer close rate.

Average customer value: The average dollar value of a paying customer.

Total customer value: Determined by multiplying the number of closed customers by the average customer value.


Efficiency metrics

Cost per acquisition: Determined by the number of conversions (transactions, leads, or closed customers) divided by the cost of the ad spend.

Return on ad spend (ROAS): Determined by dividing total revenue generated by ad spend.

Return on Investment (ROI): Determined by calculating the revenue generated minus ad spend divided by the ad spend. This metric is not an absolute ROI which would or could include operating expenses.


Using metrics to forecast performance and goals

How do all these metrics translate into goals? Let’s walk through how to calculate these metrics to create realistic goals for a PPC campaign.

Contoso, an online e-commerce store selling insulated water bottles, has an initial budget investment of $500 to promote their new line of water bottles, which sell at $35 each and has a profit margin of 40%. 

Let’s look at the acquisition metrics below to forecast how many sales they might expect based on their budget of $500.

Estimated CPC: Through research using the Bing Ads Keyword Planner, the company estimates an average cost per click of $0.53. The CPC is an estimated value and is not known yet.

Estimated paid traffic driven: Based on the estimated average CPC and ad spend budget, the company can estimate about 943 clicks for their $500 budget.
Allocated ad spend budget / Estimated CPC = Estimated paid traffic driven
$500 / $0.53 = 943 clicks
 
Next, let’s look at conversion metrics to forecast sales transactions.

Estimated conversion rate: Based on historical online sales data from their analytics platform, Contoso estimates a conversion rate of 3%. This means 3 in every 100 website visitors completes a transaction.

Estimated transactions: Looking at the estimated clicks, or amount of traffic, Contoso will drive with the initial PPC ad campaign and their estimated conversion rate, the $500 investment will drive about 28 transactions.
(Estimated paid traffic driven * Estimated conversion rate) = Estimated transactions
943 * .03 = 28 transactions

Total transactional revenue generated: If each transaction included the sale of a single water bottle at $35 and the company is estimating about 28 transactions, the total sales revenue generated on the $500 ad spend would be $980.
(Average order value * Estimated transactions) = Total transactional revenue generated
$35 * 28 = $980
With a known total cost ($500) and estimated revenue generated ($980) for one campaign, Contoso can now calculate return on ad spend.

Return on ad spend: Based on the ad spend budget and revenue generated, the company’s ROAS would be 196%.
Revenue / Cost = ROAS
$980 / $500 = 196%

Cost Per Acquisition (CPA) target: Based on the contribution margin and revenue generated, you can create the target for your cost per acquisition. In this example, to drive positive net revenue the CPA needs to remain under $14. 
 (Price Per Product * Profit Margin) = Maximum Cost Per Acquisition
$35 * 40% = $14.
 
These numbers all give Contoso specific goals to measure campaign performance against. Similar exercises can be used for lead generation businesses to determine the potential number of leads driven and the cost per acquisition from PPC spending.

When it comes to forecasting and setting PPC goals, any of the metrics here can be configured and manipulated to understand what needs to occur to reach that goal. With solid goals in place, you’re prepared to continuously optimize your campaigns to meet the goals you set, whether you want to make your campaigns more cost effective or increase website traffic.


Takeaway

It takes a little bit of time and elbow grease to work through exercises after you’ve set your PPC goals to create your baseline targets for performance. Working through exercises like this will help you understand and set realistic expectations for your PPC campaigns based on your acquisition, conversion, and efficiency numbers.   
 

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