Should Startups (Really) Spend PPC / Paid Ads?

PPC (or “paid ads”) have become immensely popular recently as they enable startups to acquire target customers effectively and reach a broad audience easily. Yet, PPC isn’t always a good option for tech startups.

Indeed, PPC can be very expensive. Also, it’s often difficult (if not impossible) to really understand how profitable PPC is for any business.

Should you spend money in PPC and paid campaigns for your startup? How much should you spend in PPC?

In this article we’ll explain the pros and cons of using paid ads and whether you should use it for your startup. Also, we’ll explain how to calculate effectively PPC campaigns profitability to know how much you should actually spend.

Let’s dive in!

What are PPC / Paid Ads campaigns?

Pay-per-click (PPC) campaigns (also referred to as “paid ads” campaigns) are a form of online marketing acquisition for businesses.

With PPC, businesses pay a fee to a platform so it promotes their content to potential customers. A few examples of PPC channels are Google Ads, Facebook Ads (which also operates Instagram Ads) and Linkedin Ads.

There are 2 main types of paid ads campaigns:

• Pay-per-click: you pay a fee as a function of the number of clicks you get from leads from a particular platform. This is the most common form of paid ads. That’s why we commonly use PPC for paid ads whilst it’s effectively one of the first type of paid ads
• Pay-per-impression: you pay a fee as a function of the number of impressions you get. That’s a bit risky, as you don’t pay for clicks but impressions only. If customers aren’t clicking when they see your ad (the “impression”), you lose money. As it’s less safe, it’s also generally cheaper vs. pay-per-click

PPC / Paid Ads for startups: pros and cons

PPC and paid ads campaigns are very attractive for startups as they allow early-stage businesses to bring in traffic quickly, reach a broad audience, and convert customers without any past experience, brand image nor organic traffic.

Yet paid ads aren’t necessarily always good either: startups can easily lose money and even go bankrupt if they don’t use them carefully.

Paid ads bring in immediate traffic

There are 2 main online acquisition channels: paid and organic traffic:

• Paid traffic is the number of visitors a business gets from paid ads / PPC campaigns
• Organic traffic is the number of visitors a business gets without spending any money in PPC campaigns. Organic traffic instead is “earned” via investment into relevant content (e.g. SEO)

The main drawback of organic traffic is that it takes times to materialise and bear fruits (at least 4-6 months minimum). It’s not uncommon to see startups investing in content for a year before seeing some real results (conversions).

Therefore, paid ads allow startups to gain traffic instantly. Instead of investing in content and waiting months to see the first results, PPC campaigns bring in immediate traffic.

As such paid ads are very attractive as they allow early-stage startups to test their products with early-adopters and potential customers early on. Indeed, early stage startups simply don’t have the time to test their MVP and adapt their products and services to their audience only with organic traffic if it requires to wait 6 to 12 months minimum.

Paid ads get you ahead of competitors

For startups with an online acquisition strategy, getting ahead of more established and/or bigger competitors in search results (e.g. Google Ads) or in social media feed (e.g. Facebook Ads, Linkedin Ads) is a massive advantage.

Paid ads are expensive

PPC and paid ads campaigns can quickly be expensive for startups. Indeed, the “bids” (per-click or per-impression) are the result of an auction.

Therefore, if you’re bidding for keyword with another competitors who’s willing to pay $2 per click but your max. budget is $1, there’s a chance you won’t even appear in the results. For Google Ads for example, the higher bid the higher your ad will appear in the search results.

PPC isn’t scalable

Unlike organic traffic which builds up over time and is therefore cheaper over the long term, PPC never scales.

Indeed, you will never be able to get more clicks for the same spending, let alone less. If your campaigns are already set correctly (you target the right audience and keywords), you will never be able to get more conversions than what you’re already spending today.

If you pay say $10,000 in PPC today and you want to get twice as many paid clicks tomorrow, you’ll simply have to double your spending.

Be careful: VCs and investors alike are very wary of things that don’t scale. That’s why they often limit startups they invest into to a certain amount of paid ads budget.

It’s difficult to assess PPC campaigns’ profitability

Determining how much you should bid isn’t as easy as it sounds.

Logically, you should spend less than the conversion value you receive in return for your ad spend right? Unfortunately, it’s not as obvious to implement as it sounds. This is true for a number of reasons:

• Tracking isn’t always working 100%. There are plenty of tools online that allow you to track live how much you spend, and how much you get from your PPC campaigns. This is possible thanks to conversion tracking. Unfortunately, for a number of reasons we won’t discuss here, conversion tracking is notoriously not always 100% accurate
• The conversion value is not necessarily a profit. Instead, you should factor in expenses such as COGS (e.g. payment processing fees, unit costs) and other expenses (salaries, etc.) to better understand whether your marketing campaigns are profitable
• The conversion value isn’t always obvious. For ecommerce businesses, conversion value is the price of a product. Instead, subscription and SaaS businesses need to estimate the customer lifetime value of a customer to really understand their conversion value. The latter implies to make assumptions which can quickly become wrong or obsolete, especially for early-stage startups

When should startups spend PPC / Paid ads?

Despite the pros and cons discussed above, there are a number of cases whereby a startup should spend PPC.

Spend PPC if you want to amplify growth

Let’s assume you have a business and already have substantial historical data to work with. You understand very well what are your customer segment(s), the conversion rates an conversion value(s).

Then PPC is a good way to make more revenues, and so profits. Keep in mind you will never be able to scale as explained earlier though: for each $1 you spend in PPC, you will get a certain percentage in profits.

Since you have a lot of data already, you will be in a position to judge whether PPC makes sense for your product(s) and optimize your campaigns accordingly.

Spend (carefully) PPC to validate ideas

PPC and paid ads can be a powerful tool for startups as it allows them to target very specific audiences and run experiments.

For example, if your customers are professionals in the education space, you can only target this group by using Linkedin Ads filters. This is very powerful as it allows for a more accurate spending and increased profitability.

When it comes to startups, PPC can be used to validate product ideas. How? You can for example design a landing page and send traffic to it, and see how the targeted audience reacts to it. Do leads sign up to your newsletter? Do they click on a buy button?

Analyzing metrics such as click-through-rates and conversion rates can allow you to run valuable experiments (e.g. A/B testing) to learn about your audience before you actually launch your product.

How much should startups spend in PPC / Ads?

Assuming you are running a pay-per-click campaign, your “bid” should be set using the following 2 parameters:

• The conversion value: the sales value of your conversion
• The conversion rate: the expected conversion rate of your campaigns

Let’s use 2 different examples to better understand how you should approach PPC spending for your startup. For these examples we’ll use the most common form of paid ad: pay-per-click (vs. per impression).

The ecommerce example

Let’s assume you have a ecommerce website and:

• You convert in average 1% of your (paid) visitors
• The average conversion value $150

Logically, you shouldn’t spend more than $1.50 per click. Indeed, for each 100 visitors, you only convert 1 which gets you $150 in revenue. Dividing $150 by 100 visitors gets you $1.50 per click.

Unfortunately, the $1.50 is part of the answer. Indeed, as explained above, whilst conversion value is $150, it isn’t profit. If you spend $50 to produce this product for instance (and excluding other fixed costs like salaries), the net conversion value is $100. This means you can theoretically spend $1.00 per click (and not $1.50) for your PPC to be profitable.

The SaaS example

Let’s assume you have a subscription startup and:

• You convert in average 1% of your (paid) visitors
• The monthly subscription price is $10 ($120 annually)
• Customers churn on average after 3 years

Here, the conversion value isn’t as obvious as for our ecommerce example. Using our assumptions, the conversion value (also referred to as customer lifetime value for SaaS businesses) is $360 (3 years x $120 per annum).

In this case, you shouldn’t spend more than $3.60 per click for your PPC campaign bids. Same logic here: if you spend $3.60 per click, for each 100 visitors you will get 1 conversion valued at $360 over the next 3 years.

Yet, as it is for our ecommerce example above, you shouldn’t consider that each customer gets you $360 in profits: it’s revenues instead. You should factor in any expenses to really understand how much you should spend in PPC.

Example: if you make 40% margin for each customer, then your net conversion value is $144. This means you shouldn’t spend more than $1.44 per click for your PPC campaigns to truly be profitable.