How much are you overspending on paid advertising?

Published: November 2024

A photo of water leaking from a bucket. — If it feels like your advertising budget drains too fast, read on to see something amazing.

Our clients are increasingly turning to us to optimize their PPC funnels—and for good reason. Rising costs, competition, and the current economic climate have driven ad prices ever higher, ballooning budgets and decimating profits.

In the face of this reality, there are really only two options:

Throw (even) more money at advertising.
Convert more of the traffic you are buying into customers.

Option 2 has saved our clients millions of dollars, and its effect on advertising budgets can be profound.

Before we get to the (mind-blowing) numbers, let’s look at why Conversion Rate Optimization (CRO) is a critical discipline for PPC advertisers.

PPC and CRO are essential partners

While PPC campaigns focus on delivering well-qualified leads, CRO is obsessed with what happens next. How many of those precious leads become customers? What’s working? What’s not? What are the issues and opportunities? How can we improve the conversion rate?

Here’s one way we think about the process, taken from our methodology:

The best way to visualize this process is by thinking about blocked arteries and missing links. Just as an artery in your body is the highway that carries large volumes of blood, an artery in your business is a high-volume pathway that leads to sales. Once we have identified your business’s arteries, we search for blockages in them—that is, aspects of them that are underperforming.

CRO is an intensely practical process, combining in-depth research, expert analysis, and scientific testing. There’s no guesswork, just a relentless focus on raising the conversion rate.

In that sense, PPC (offsite) and CRO (onsite) are two sides of the same coin.

In fact, CRO’s effect on advertising budgets can be so disproportionate that it’s difficult to put into words—so we’re going to use numbers instead.

What happens if you double your conversion rate?

Let’s imagine that your company has a 2% conversion rate and a monthly PPC advertising budget of $50,000.

Your PPC ads have a cost-per-click (CPC) of $2.00, so the monthly budget delivers 25,000 visitors per month.

$50,000 / $2.00 = 25,000 PPC visitors (paid traffic) per month.

The website’s 2% conversion rate means that 25,000 PPC visitors create 500 orders each month. To round out our example, let’s imagine that the average order value (AOV) is $200 and the gross margin is 70%.

500 x $200 = $100,000 in sales.
$100,000 x 70% gross margin = $70,000 gross profit.

Finally, let’s subtract the cost of advertising:

$70,000 - $50,000 ad cost = $20,000 contribution to profit and overhead.

Here are those figures again, laid out as a table.

	2% conversion rate
Monthly ad costs	$50,000
Cost-per-click (CPC)	$2.00
Paid traffic	25,000 ($50,000 / $2.00)
Orders	500 (25,000 x 2% conversion rate)
Sales	$100,000 (500 x $200 average order value)
Gross profit	$70,000 ($100,000 x 70% gross margin)
Contribution to profit and overhead	$20,000 ($70,000 - $50,000 advertising costs)

Now imagine that we doubled the website’s conversion rate to 4%. What would happen?

Unless you’ve done this kind of calculation before, it’s easy to jump to the wrong conclusion—that the final number will also double.

But look what actually happens:

	2% conversion rate	4% conversion rate
Monthly ad costs	$50,000	$50,000 (Unchanged)
Cost-per-click (CPC)	$2.00	$2.00 (Unchanged)
Paid traffic	25,000 ($50,000 / $2.00)	25,000 (Unchanged)
Orders	500 (25,000 x 2% conversion rate)	1,000 (25,000 x 4% conversion rate)
Sales	$100,000 (500 x $200 average order value)	$200,000 (1,000 x $200 average order value)
Gross profit	$70,000 ($100,000 x 70% gross margin)	$140,000 ($200,000 x 70% gross margin)
Contribution to profit and overhead	$20,000 ($70,000 - $50,000 advertising costs)	$90,000 ($140,000 - $50,000 advertising costs)

As we can see, doubling the conversion rate from 2% to 4% yields a 4.5X increase in contribution to profit and overhead ($90,000 / $20,000 = 4.5).

A graph showing the difference between a website that converts at 2% and 4%.

Imagine how that kind of increase would benefit your company.

And that’s not all. Let’s consider the other side of this doubling. What if you could take in some of that $50,000-a-month PPC budget and redirect it to other areas of the business?

How much were you overspending on paid advertising?

Ready for more math? Stick with us—this is where things get even more interesting.

With a 2% conversion rate, you were spending $50,000 on ads to generate a $20,000 contribution to profit and overhead. But if the website’s conversion rate had been 4%, what would you need to spend to achieve the same results?

We can reverse-engineer the answer because we know that contribution to profit and overhead per visitor is fixed for a given conversion rate. In this case, the per-visitor figure is $3.60 ($90,000 contribution to profit and overhead / 25,000 visitors).

To generate a $20,000 contribution to profit and overhead, the “4% website” would only need 5,556 visitors ($20,000 / $3.60). And once we know the number of visitors, the rest follows easily.

	4% conversion rate
Target contribution to profit and overhead	$20,000
Per visitor contribution to profit and overhead	$3.60 ($90,000 / 25,000 visitors)
Total paid traffic required to reach target	5,556 ($20,000 / $3.60)
Cost-per-click (CPC)	$2.00 (Unchanged)
Monthly ad costs	$11,111 (5,556 x $2.00)
Orders	222 (5,556 x 4% conversion rate)
Sales	$44,444 (222 x $200 average order value)
Gross profit	$31,111($44,448 x 70% gross margin)
Contribution to profit and overhead	$20,000($31,111 - $11,111 advertising costs)

The original website required a $50,000 ad spend to generate $20,000 in contribution to profit and overhead. The 4% website needs only spend $11,111 on ads to achieve the same result.

In other words, you were overspending by nearly 78% on advertising—or paying 350% more than needed—every single month.

The numbers tell quite a story, don’t they?

Would you save 78% or reinvest to 4.5x your profits?

The 4% conversion rate has given you a fantastic choice to make:

Save the $38,889 / month and invest it in other parts of their business. (Did we mention that CRO is a relentlessly rewarding process?)
Reinvest the savings into PPC traffic, scaling profits further and compounding success.

As we say in our article, The Power Law of CRO:

Once your conversion rate has increased, you’re more profitable. It pays to sacrifice some of that profit into increasing your advertising bid prices—which can dramatically increase your number of customers. You can outbid your competitors and profitably dominate all the advertising space in your market.

In a similar way, money.co.uk leveraged this principle to fuel their growth. After working with us, here’s what Chris from money.co.uk said about their experience:

“The biggest impact was on our PPC activity—Google Ads, Bing, etc. The increases in conversion made it possible for us to buy more traffic and negotiate better commercial deals with advertisers, which had a direct impact on our bottom line. The improved conversion rate even allowed us to enter new markets and expand into high-cost advertising channels like TV. TV is very expensive, but the better we can convert visitors, the more affordable this kind of advertising becomes.”

PPC spend for money.co.uk — The rise in conversion rate allowed money.co.uk to greatly increase its spend on PPC advertising—and reap huge rewards.

To learn how your company can leverage these techniques, book a free strategy session with one of our consultants.

Two free bonuses you get by using CRO with paid advertising

The CRO benefits above come with a couple of sweet bonuses.

Bonus 1: Your wins apply to all your visitors

Your conversion improvements will often work as well for your other channels (such as search and social) as they do for paid traffic. A better page design, headline, or checkout flow benefits all your visitors (though we still recommend testing to be sure). None of the calculations above accounted for organic or returning customers, but you’ll still see the improvements on the bottom line.

Bonus 2: CRO can lower your CPC rate

CRO doesn’t just improve your website—it can improve your advertising too.

Whether the research uncovers an untapped audience, a hidden objection, or a highly converting headline, CRO insights can often be applied to PPC strategy as well. In the example above, every $0.40 reduction in our CPC shaves $10,000 from our advertising budget.

For more about transferring CRO wins, see step 9 of our methodology.

Why doubling your conversion rate may be closer than you think

Doubling your conversion rate might sound ambitious, but with a data-driven approach, it’s more achieveable than you might expect. Because improvements compound at each stage of your funnel, you might only need four strategic wins of around 19% each to achieve a doubling effect:

Improving your landing page increases visitors to product listings by 19%…
Improving your listings increases visitors to product pages by 19%…
Improving product pages increases visitors adding products to their baskets by 19%…
Improving your checkout increases… checkouts by 19%.

In fact, a 19% increase at each stage would result in a bit more than a doubling in your conversion rate: 1 x 1.19 x 1.19 x 1.19 x 1.19 = 2.005.

However, achieving these wins isn’t just a matter of tweaking each step—it takes a deep understanding of user behavior, rigorous testing, and a targeted optimization strategy.

To put it into perspective, during the week we wrote this article, the four latest wins from our Wins Database showed improvements of 21%, 53%, 10%, and 101%. When compounded, these improvements would result in a substantial increase in conversion rates.

Book a free session to model your funnel

That’s it for the math, we promise—but if you run PPC ads, these calculations are worth committing to memory. Or, book a free (no obligation) strategy session with us, and we can plug your numbers into our calculator so you can see what CRO could save or make you.

If you’re investing in paid traffic, it’s never too soon to start.

Schedule your FREE strategy session

Talking of doubling conversion rates…

Our B2B client, DS Smith ePack, saw their conversion rate more than double during a six-month period. Here’s Fabrice Clerc-Renaud, Managing Director:

“When we started the project, our conversion rate was about 1.5%. We have clearly seen a very substantial increase: 3.4%. So we have basically seen more than double during this six-month period.”