As Google and Microsoft Ads managers, one of our primary client-facing jobs is to discuss budget allocation with clients as part of our proposal or ongoing engagement. This conversation can range from “I have no idea what to spend, can you help me please Obi-Wan” through to “give me five good reasons, backed with scientific data and a lien on your car as to why you’re proposing this amount of spend”.
Budget is complex and nuanced and intersects with many individual business factors. However, it’s important to come to the conversation prepared. Not only does a thorough budget preparation process create trusting client relationships, it also sets the tone for a well-executed campaign.
When you have an existing account with data but you need to know what your theoretical maximum spend could be and you’re designing a campaign, we see it as a four-step process:
Step 1: Data, Data, Data… And Math
The first step to calculating a budget is to consider the maximum spend potential that could have happened in that account when looking at the last 30 days data.
There’s a great article here explaining how this can be effectively calculated. In case you didn’t want to dig through all of that, we simplified it to make it easier, so if you had an account with the following metrics, you’d calculate maximum spend potential as follows:
However, while we were on a roll, we even built you a little calculator you can use here instead of building your own spreadsheet (so bookmark this page – and feel free to share it with joyous abandon!).
Metrics Last 30 days:
- Spend = $2000
- Impression Share = 30%
- Lost Impression Share (Budget) = 10%
The formula then becomes:
- (2000 x (30+10))/30 = $2,666 = Maximum Spend For Previous 30 days.
Of course, there are some key considerations before you run off into the sunset to propose this Max Spend Last 30 Days number as the new monthly budget.
- The Law Of Diminishing Returns (also known as more-of-the-same-input-doesn’t-promise-an-equal-uplift-in-output). Just adding more money to your budget doesn’t necessarily mean you will get the same return as before. Some bid strategies are better than others at managing this, and we’ll be discussing that in a future article for you all.
- Ensure that your budget recommendations are adjusted to take into account the history of the account (the same time last year, or the sales cycle for the business and/or vertical) and also any events or special days that will be coming up (eg. Black Friday). Be sure to allow for any uplift or downturn in demand that will be expected to result from these events.
Step 2: KPIs And The Dreaded Unspoken Drivers
Once the maximum possible spend has been determined, and takes into account other extenuating factors for the business sales cycle, then it’s important to talk about KPIs and business drivers.
E-commerce businesses are often driven by ROAS, so it’s important to ask if the ROAS goals are achieved then can budgets be expanded? Are there any supply chain, staffing, or fulfillment issues that would impact such a simple strategy? Is it as simple as 1 dollar in = X dollars out, or does the business have a more nuanced set of goals?
Lead-gen clients often provide their agency a set budget and a CPA target to hit, however, it’s important to understand how well the clients are measuring their conversions, online to offline sales, and if you were to uplift budget would that cause any problems for the operations of the business. Ie, if you’re selling air-conditioning unit services, CPA is only part of the picture. In this situation, the budget will also be informed by the maximum number of services the business can cope with within their current staffing limitations and service cycle.
For both lead-gen and e-comm clients, budget will also be informed by whether the business has KPIs that aren’t directly linked to economic ROI. Ie.. do they have a brand strategy that takes precedence over ROI for part of their budget, or are they seeking to dominate a new or existing competitor?
We recently published an article about PPC and Brand Strategy ‘When you Should and Shouldn’t Bid On Brand Terms’
Customer lifetime value (CLTV):
Does the budget take into account the CLTV of a client and the relative cost of acquisition? Hubspot has a calculator for, well, calculating, the CLTV for a business. This has to underpin the business budget allocation. It’s also important for a business to understand if the CLTV differs when customers come from one channel vs another.
Microsoft Ads might have less volume, but it DOES have an older and more affluent demographic, so that’s a perfect example of understanding the CLTV for a client and how it relates to the channel of acquisition. Better CLTV in Microsoft Ads, coupled with what is traditionally a lower CPA equals a great opportunity to recommend the budget allocation includes an allowance for Microsoft Ads. In fact, in the case of some managers we see them using up as much of the budget as they can in Microsoft ads (10%? 20%?) and then spending the remainder in Google across their various campaigns; great for client risk diversification and also agency revenue uplift.
Equally, if you’re managing both paid search and paid social for a client, then understanding the CLTV of social and search will impact how you weigh the CPA of each channel when making your budget recommendations.
Make sure you determine with the clients what percentage of the CLTV is acceptable to spend on acquisition costs. You may have different percentages that vary with profitability tiers if you are selling products or services that have different profit margins.
Set Your Benchmarks:
You now have everything you need to set benchmark CPA or ROAS targets. Always sense check these targets though and make sure you include agency fees in the costs (or wages, if you’re managing your campaigns in-house).
Hubspot have a pretty sweet advertising ROI calculator that’s worth checking out.
BEWARE the unspoken drivers:
Businesses will sometimes SAY that they only care about CPA, but then after you’ve spent their budget chasing the best CPA you’ll get an upset phone call that their primary competitor dared take their number one brand position. Make sure you ask about the explicit and unspoken drivers.
Varied internal company drivers:
Different departments or managers can have different KPIs and will value your efforts differently. Probe gently to discover if your company contact is the be-all-and-end-all of budget decisions or if someone else in the company will have a competing agenda.
- Budget to try and improve key metrics, even if hitting business KPIs. For example, extra budget flexibility to test X or Y strategy
- Flexibility to adjust budgets according to market conditions, such as competitors, news events, sales, etc.
- Budget to run experiments between channels
Step 3: Pace Yo Self
The budget needs to be more than just a proposed amount of spend. HOW will it be spent?
- Will it be spent evenly throughout the month?
- Will it be tapered to spend more at the start or end of the month?
- Will it even be designed as a month-to-month budget (doesn’t always work well with retail seasons!) or on a different cycle?
- Does historic data suggest some periods or days of the week that should be avoided or targeted?
- Are there sales periods that should be considered?
- Does the business have shut down/holiday periods where they need to reduce or eliminate spend?
- How will you share the budget between the campaigns?
- How will you move budget between the campaigns and based on which events?
- If they have multiple locations or are a franchise, do you need to spend budget evenly between them or do you need to ensure you spend set amounts per location?
They’re just a few of the budget pacing questions you need to answer before making robust recommendations to your clients.
Pro Tip: If you’re not already using us, PPC Samurai is pretty ninja at budget management, all the way from simple to incredibly complex. It allows you to pace budgets with parent and child campaign groups, and to automatically pace towards budget targets. Additionally, PPC Samurai allows you to flick a switch that will automatically move budget from poorly performing campaigns to better performing campaigns if they are limited by budget; all the while providing a great visual dashboard where you can see your pacing and campaign metrics at a glance. It’s one of our most loved features!
Step 4. Reporting BABY!
So, make sure you confirm a reporting plan with your clients. Data is just data unless you make sense of it for your clients, so make sure that your reporting process helps your clients to make sense of the information you’re giving them.
Some questions you’ll need to ask clients, and yourself
- What feedback cadence and process is reasonable for the account size?
- What data is important to feedback (hint: will be related to the KPIs you already got them to sign off on!). Death-by-Data is real – don’t drown your clients.
- What mechanism will be used to collate data and to provide reports? We often use and recommend Google Data Studio for this – it’s free and pretty simple to set up, with plenty of templates floating around the internet.
- Who do you need to contact with your reporting if you want to discuss anything mid cycle? Ie.. budget changes or increases or decreases in spend?
- Know who you’re reporting to both directly and indirectly and what pressures are on them. Big companies can be surprisingly opaque with more internal politics than a season of Survivor.
In Conclusion (TL;DR)
When you design a budget proposal for a client you’ll need to consider the following areas:
- Use data and a formula (provided) to uncover the maximum spend potential of the account, taking into consideration the law of diminishing returns and seasonal impacts.
- Understand the business drivers, the customer lifetime value, the acquisition goals, the unspoken drivers, any varied internal departmental goals and from there you can benchmark the CPA or ROAS targets, as appropriate to the account and the company supply chain/fulfillment potential.
- Further, consider your personal drivers in how you construct the budget proposal. How could they intersect with the business drivers to supercharge both your outcomes?
- Have a robust and reactive budget pacing plan that you can view and monitor at a glance with target spends and parent and child campaign groupings considered; brand vs non-brand or by location or product type etc. Hmmmm….what product could possibly help with THAT? 🤔😬
- Have a reporting process that takes into consideration the need for iterative improvement and a client feedback cycle and focuses on making sense of data, not just gifting reams of data to your clients.