Marketing and Sales Funnel Math
How much traffic do you need in your marketing and sales funnel and what does it cost?
Estimating website traffic requirement. A Step-by-step guide and case study.
In this article we will walk through a case study and discuss step by step how to estimate your budget requirements. We will start with the basics. I will walk you through a step-by-step example and give you the exact formulas. You can follow the steps or go to the briefing center and download the template with an example. There you can also benefit from the group coaching.
As a case study we will use the marketing campaign for a BBQ grill set. The underlying data is based on Googles Keyword Planner.
Later, in a related blog post, I will show you some advanced techniques how you can deal with uncertainties. In other words, we will calculate an estimated range for the budget even if you do not know all the numbers for all the assumptions yet.
Related to this topic you can find a video and sample templates to get you started quickly. You can download these at the briefing center website and adapt it to your requirements.
Why it matters estimating website traffic and how much budget you are asking for?
When you are preparing your go-to-market strategy and campaign strategies and tactics it is important to know the order of magnitude for the budget you will need. Latest when you are presenting your business case you will need to know what you are asking for. And of course you need to decide how much budget to allocate on marketing versus sales.
How do you feel when you have a marketing job to do, you a great idea and you don’t get the funding? It is a pity when you have a great product and you miss the market opportunity. It is embarrassing when you must go back and ask for more budget. And this hurts your credibility. So, let’s take a look how you can firm up your business case.
3 important questions to ask about your campaign
The key questions to ask about your campaign should include:
- – Is it feasible? In other words: do the resources support the requirements?
- – Is it profitable? In other words: will you collect more money than you spend?
- – Does it scale? In other words: can you grow revenue faster than costs?
The marketing and sales funnel
In the marketing and sales funnel, we are interested in how we can tap into a significant search volume to attract visitors to our website and convert them into leads and finally into buyers.
We can calculate the yield (% conversion) top down. And you can use the same logic to calculate backwards from your quota (= how much you must sell) to the budget requirement.
This is what we will cover in this blog post and in the related video.
From search volume to clicks
The first step is to find out what the search volume is for your set of keywords.
It is important to do the keyword research before any further planning and even before building your landing page! You can use the keyword planner in Google, Bing and other tools for this.
A word of caution: what you will get from these tools is not necessarily the exact search volume but a sample or what I would call “directional data points”. Take it as rough order of magnitude.
Why do you need to know the approximate search volume before our campaign launches?
Because you need to find out if the search volume is large enough. If you want to sell more product units than there is indicated search volume in the market, then you need to revise your keyword strategy (see below). Worst case, you need go after other channels and other routes to market.
Secondly, setting SMART objectives for your agency and marketing requires realistic assumptions. Knowing the numbers for search volumes is certainly helpful in that conversation.
How many impressions do we need?
We can obtain a first estimate for the required impressions:
Let’s say we spent about 1’000,- on a test campaign. Dividing the budget by CPC gives us the number of clicks we should expect. This would tell us that we should expect about 1,745 clicks. We just need some basic equations:
Budget / CPC = Clicks
with some basic algrebra gymnastics we get
Budget = CPC * Clicks
Impressions * CTR = Clicks
Hint: You can get the CPC estimates also from the keyword planner. Again, take it as “directional data points” and not as exact inputs. The real CPC can vary widely because it subject of the bidding process in the search engines. The search engines may give you just a sample of the data.
Applying the CTR (click-through-rate)
Since we know that
Impressions * CTR = Clicks
Assuming a 6% CTR (which would be great indeed!) we can calculate that our 1,745 clicks would require roughly 29,084 impressions. Note: it is fairly common that the CTR is around 2% or below. This makes the planning even more important, because you could completely miss the market opportunity.
From clicks to customer acquisition cost (CAC)
Base on a 5% conversion rate (which again would be great!) we get 87 unit sales.
Now we divide the budget we spent by the unit sales and we get our estimated customer acquisition cost of 11,-.
From CAC to campaign P&L
Now we are going a step further. We want to know:
What is the financial contribution of our digital marketing campaign?
And yes, it’ll better be a positive contribution! Otherwise you can scratch the campaign idea and go back to the drawing board!
How will we do this? It is quite simple. As ingredients we need the unit price and unit cost. From there it is easy.
Revenue = units * unit price
COGS = units * unit costs
And adding our cost of marketing, which is the budget of 1k- we spent, we can put our pro-forma campaign P&L together. We can calculate the expected gross contribution margin for this campaign now.
Looks great, doesn’t it? And yet, why are most people not doing this exercise?
If you are a manager or executive with responsibility for a sales quota and budget you should demand an estimated campaign profit and loss statement.
The tool for campaign budget planning and profit estimation
What we have now is a neat little tool we can use to put the assumptions about our campaign into a coherent framework.
This gives us a few advantages:
- We can assess if the campaign makes sense at all.
- We can make the assumptions transparent for our team and decision makers.
- We can argue for allocating budget to this campaign.
- We can compare our proposal to other alternatives and to competing budget requests.
Reality check for feasibility and campaign performance
Another important aspect is to check if the campaign is feasible. For example, we need to ask if there is enough search volume, given a certain sales volume we want to achieve.
In this example we can see that the required impressions would be much larger than the search volume based on our initial keyword search. Therefore, we need to find a way to deal with this.
One way is to include more long-tail keywords. That means we are included related keywords or broader search terms.
Longtail keywords tend to have wider variation in CTR (click-through-rate)
Now it gets a bit challenging. When you analyze the keywords for the term “BBQ” you will find that the range of CTRs varies quite significantly. It could be as low as 4% and as high as 13%.
That is good news and bad news:
The good news is that there some “gold nuggets” in the long-tail keywords. These have a reasonable search volume and a high expected CTR. We want to find those!
The not so good news is that there will be some keywords which will not drive so much traffic. These are the keywords with low CTR. Also, look especially for those keywords with low CTR and high CPC. Unless there is a good reason to keep them, you want to weed out those and make sure you’re not spending any budget on them. Practically, you would need to monitor the keyword performance or set automatic rules in your campaigns.
In this blog post we covered the basic estimation of required search traffic and budget. We assumed a fixed value for key parameters. For example, we assumed that the conversion rate would be 6%. But we really do not know the exact value until we launch the campaign or the test. If we want to know possible outcomes for a range of CTR values, we need to take it to the next level.
This is the subject of a related post and video about remarketing and estimating website traffic and digital marketing campaign performance under uncertainty.
Another area for further improvement and boosting campaign performance is remarketing. In a related blog post I am discussing how to optimize your remarketing mix.
In this blog post we walked through a step-by-step guide how you can estimate search traffic and budget requirements for your campaign. We created a handy tool which allows to
- Estimate campaign performance.
- Estimate expected traffic on your website or landing page.
- Estimate budget requirements, given a certain target for sales volume and given key parameters such as CTR and Conversion Ratio.
- Estimate CAC (customer acquisition cost)
- Conduct reality and feasibility checks.
- Estimate profit margin contribution as a campaign P&L.
- Assess if the marketing and sales funnel is sufficient to attain the quota.
We can also use the tool to compare different digital marketing and sales campaign alternatives.
In the related blog post we will take the same example and work with estimation and planning und uncertainty.
Which of these tactics have you implemented and what was your insight?
Briefing center with templates (log-in required).
Reverse calculate how much budget you need for your campaign. Apply sensitivity analysis to deal with uncertainty of the key parameters. Kick back and watch the video.