So often it seems companies throw a dart at the board to ‘determine the cost of paid ads’, as they call it.
We call this a ‘finger in the air’ approach.
They have questions like: “How much do ads on Google cost? How much do ads on Instagram cost?”, when the real question is, how much can the company afford to pay to acquire a lead (otherwise called enquiry) before it becomes unprofitable?
In truth, we believe there are two main factors that help you figure out your cost per enquiry:
Let’s look at how to work out your budget using these numbers.
The total number of sales you need from your ads can only be figured out if you are super clear in your head about how much money overall you want to make in a set period of time (usually this is calculated per month).
When you have the overall figure, divide it by your average sale amount, and you are left with a rough estimate of the number of sales you need.
Say you want to make £10,000 per month in sales and your average sale is £1,000, this means you will need 10 sales to reach the target.
Write your number down now, as you’re going to need it for the calculation we’ll be making at the end of this blog.
Just because you decided you want to make a million by spending £200, that doesn’t mean it’s going to happen!
Remember to account for your fixed costs in your overall sales amount, unless those costs are taken out somewhere else; otherwise you risk allowing more that you can afford to pay to acquire a new customer.
Write this number down too, as you’re going to need it for the calculation we’ll be making at the end of this blog.
The other factor to consider in order to figure out your cost per enquiry is conversion rates.
Even the most skilled salespeople out there are not going to turn every single enquiry into a sale, so you must consider how many enquiries you need to close a customer.
If you’re an ecommerce business, don’t fret! You can apply the same thought process; the ratio between the people who start the checkout and the ones who end up buying is your conversion rate.
If you’re a company that employs a sales team, knowing their conversion rate is fundamental, as it tells you how many leads you need overall to make the campaign work for you.
Is it one in 2? One in 5? One in 10? Whatever the number, write it down, as again, you’ll need it for the calculation below.
Once you have all your information, let’s put it together with this example, in which we close a sale every 5 enquiries:
Total Sales Amount / Number of Sales = Average sale amount
£10,000 / 10 = £1,000
Average sale amount – fixed costs = profit per sale
£1,000 – £200 = £800
Profit per sale / conversion rate = maximum cost per enquiry
£800 / 5 = £160
In this example, £160 is the maximum amount you can spend per enquiry before the numbers don’t work anymore.
Of course, the lower the cost per enquiry compared to £160, the better for you, but this is down to hundreds of factors, most of which are outside of your control.
You DO now have a maximum amount you can spend, so let it become your benchmark, especially at the beginning, when you don’t have historical data you can review.
The longer the campaign runs, the more testing and optimisation you do, the more you can expect the cost per enquiry to decrease.
Find it out. It is simply TOO important. Without these numbers, we would recommend you don’t start running ads.
Having a benchmark cost per enquiry is essential for creating effective, high-quality ad campaigns.
To get good results, you need to be able to determine the best allocation of funds. If one ad is generating enquiries within the cost and another one is way more expensive, the decision of which ad to keep will be obvious.
Try to make that decision without having the benchmark in the first place — impossible!
If you have more questions about running paid advertising campaigns (and working out a sensible cost per enquiry!) contact a member of our team today.
