“You must spend money to make money” – Plautus
Most people have heard this famous phrase coined by a Roman playwright over 2,000 years ago. It’s a common business philosophy, rooted in the idea that in order to actually start earning money, there are unavoidable costs that must be incurred first. It may not be the most popular concept, but it’s hard to imagine any kind of business that could generate revenue and turn a profit without fronting any costs.
Pay-Per-Click (PPC) advertising is one of the best examples of literally spending money to make more money. As the name implies, you’re committing to pay a certain amount for every click in a campaign, with the goal of converting those clicks into leads and those leads into sales.
Since Capterra is a PPC channel for software vendors, it’s only fitting that I discuss two ways we think vendors should budget not only on Capterra but on ALL PPC channels.
Set a Bid with Customer Acquisition Cost
One of the more accurate ways to manage PPC advertising budget and bids is by using your own sales performance data. If you know how much you want to spend to acquire a new customer, it simply takes a bit more math to drill down to the perfect bid per click.
If you can generate as many leads as you want, knowing that you won’t spend more than what it takes to close the deal, why wouldn’t you? As long as you know the absolute max you’re willing to spend per click, you shouldn’t even consider setting a fixed monthly budget that could hold your business back from a new sales record month.
So how do you actually figure out what that perfect bid is that will generate the most leads for your software?
First, you need your Customer Lifetime Value (CLV). This is how much a customer is worth to you based on the cost of your software and the average time they’re a user. For example, if your software costs $1,000 per month and the average user stays a customer for 2 years, your CLV is $24,000.
$1,000 x 24 months = $24,000
Next, you need to know what percentage of this $24,000 you’re willing to spend to acquire a new customer. We believe 5-10% is conservative, for profit-focused vendors, where 20-30% is a more aggressive number for those looking to grow quickly. Let’s try the aggressive approach and go for 25%, which gives you a target customer acquisition cost (CAC) of $6,000, meaning you can’t spend more than $6,000 to acquire one new customer.
25% x $24,000 = $6,000
Now let’s determine your target cost per lead (CPL) with both your sales qualification rate and close rate. In this example, we’ll use an SQL rate of 20% and a close rate of 10%, giving you a CPL of $120. So the maximum amount you can spend on a lead to keep it within your target CAC is $120.
20% x 10% x $6,000 = $120
Finally, use your CPL and lead form Conversion Rate to determine your target bid. In this case, with a CPL of $120 and a 10% conversion rate, your target PPC bid is $12.
10% x $120 = $12
If you’d like to avoid doing your own math, just use our PPC Bid Calculator to find the perfect bid. Once you have that target bid, you shouldn’t even think about setting a budget or limit of any kind! No matter how high your spend may seem, you’ll see the conversions and new customers that will make it all worth it in the end.
Set a Budget for a Certain Time Period
While not ideal, we understand some companies get a set marketing budget for the year and have to make it last, but that doesn’t mean you can’t keep your listing live all 365 days of the year. It just lends to a different way of thinking about your budget.
If you’re confined to a monthly budget, your goal is to generate as many leads as you can within that budget. Once you’ve run out of money, that’s it, no more leads for the rest of the month. One way to avoid this issue is to increase your monthly budget to stay live all month at the same bid. However, we know this isn’t always realistic in the business world of red tape and bureaucratic policies galore.
Our instincts in the PPC world is to aim for the top spot, where we think we’ll get the most traffic, clicks, and leads. I’m not saying that isn’t a premier location, and there definitely will be more traffic to those listings above the fold, but this strategy only makes sense if you have the budget to back it up. Ranking first but only having the budget to stay live for the two days will not get you as many clicks and leads as ranking 8th for the entire month.
Let’s say you have a monthly budget of $2,000 and your page converts at 10%. For the sake of this example, your conversion rate will not change based on the bidding position.
Now seeing it all laid out in front of you, how many leads would you (and your boss!) like for $2,000: 20, 40, or 60? And how much would you prefer to pay per lead: $100, $50, or $33? (Hint: there is a right answer and it’s 60 leads at $33 per lead!)
And better yet, by bidding at the 7th position, you’ll only spend $1,800 over 30 days ($3 x 20 clicks x 30 days) while still generating more leads at a lower CPL than the higher positions.
While web traffic and lead conversions will vary by directory and vendor, the strategy will yield the same results: a listing live all month at a lower position will convert more clicks into more leads for a lower CPL.
While these aren’t the only ways to set a PPC advertising budget, they are by far the most common and effective tactics for software marketers. So if you’re constantly hitting some sort of limit and losing out on leads for days or weeks of the month, experiment with one of the above budgeting tactics, and let the results speak for themselves. Then let us know how it went in the comments below!