How Much to Spend on Your Google AdWords Budget

Whenever Everest takes on a new Digital Marketing client, one of their first questions is almost always regarding how much to spend on their pay-per-click (PPC) advertisements.

The answer, like many things in business, is: it depends. However, before delving into the tactics used to create an appropriate budget, it’s important to make sure that your businesses is ready for AdWords in the first place. For this discussion, the most relevant point to consider first is:

• If you cannot invest a minimum of $300 (and ideally at least $500) into AdWords per month, you may want to consider placing that money elsewhere in your marketing strategy.

Assuming you have at least $300 – $500 to invest per month, we will begin with the key factors that go into determining your business’ optimal budget.

Cost of Your Industry’s Keywords

Certain industries have stiffer competition in AdWords. For instance the legal, insurance, and drug rehab industries tend to pay a steep price for their ads to be placed on relevant searches. As an example, the average cost per click (CPC) on an advertisement shown on the search “auto insurance quotes” exceeds $50.

On the other hand, their prices have climbed so high because they tend to be profitable – the lifetime value of gaining a new customers in those industries far exceeds paying $10,000 to acquire them. (See “Average Lifetime Value” section)

There are a number of strategies we implement when researching the search terms we want to place clients’ ads on. For instance, an easy way to take down the cost of “auto insurance quotes” is to turn it into “auto insurance price quotes,” which is only $25.84 per click. That is still a very steep price compared to some other industries, but the principle applies everywhere. Our Keyword Research article goes over this and other strategies in greater detail.

Regardless, if you are an insurance salesman, your budget will need to be much higher than a cupcake bakery to see similar results.

Website Conversion Rate

If you have an e-commerce site, it is important to uncover what your average conversion rate is. For instance, if two out of every hundred visitors to your website purchase something, you have a conversion rate of 2%.

If you offer a service instead of an online product, you may wish to track your conversions in terms of contact form submissions, email sign-ups, etc.

The conversion rate you get from social media, emails, organic search, or your paid advertisements will likely all be different. Make sure for determining your AdWords budget that you are tracking that source specifically.

Average Lifetime Value

This is a factor that many business owners often forget, opting instead for the average revenue received from a single sale.

Particularly if you are in a high-competition industry, taking the lifetime value of new customers into account will drastically change how much you are willing to invest into acquiring them.

For instance, you could consider that the average sale you make on your site is $50 with a 2% conversion rate, and thus only believe you make a profit on your ad if you keep your CPC below $1. But consider that often you will have repeat customers who spend perhaps $2000 on your products over their lifetime. This does not even take into account the potential of new referrals and word-of-mouth from that new customer. With that in mind, you are still profitable even with a CPC of $40.

However, calculating the Lifetime Value of a new customer requires a breadth of data you may not have. If that is the case, it may be safer to stick with the average revenue per individual sale.

Putting it All Together

Now you are familiar with the three main, basic factors that go into calculating an optimal budget. Once you have a good idea of your general CPC, you can create a starting budget. We generally let client’s initial ads run for 3 months to collect initial data. We then use that data to create a profitable long-term budget, with consistent updates based on performance.

The Perfect Starting AdWords Budget

Using the CPC of your chosen search phrases, we suggest to all new clients that they set a minimum budget of whatever it will cost to garner a minimum of 100 clicks on your ad – though the more you can afford to get, the more your future advertisements can be optimized for increased profitability. We also recommend that you test at least 3 ads to see which is the most effective and why.

So, if the average CPC of your three ads is $5, we would recommend investing at least $1500 per month into your Google AdWords budget. When you set your budget in your AdWords account, it must be entered in as a daily budget, so simply divide your monthly budget by 30.

It is entirely possible and quite common to not turn a profit, or even operate at a loss during your very first campaign. It is a rare business that creates perfectly optimized ads their first time through, particularly if this is your first time using AdWords. Do not be discouraged if this happens to you – see the first three months of your campaigns as an experimental phase. You will then have plenty of data to use to optimize your ads for increased profitability during the next phase.

The Perfect Long-Term AdWords Budget

Down the line, once you’ve gathered plenty of data on your click-through rates, conversion rates, customer value, and typical CPC, you can create advertisements that are nearly guaranteed to be profitable.

If you have created an advertisement that has an average conversion rate of 3%, an average purchase of $50, and an average CPC of $1, you know you are making $.50 profit per click. At this point, there is no reason not to invest as much as possible into that advertisement – the ROI is clear! This is why companies like Amazon and The Home Depot invest over $50 million per year into their AdWords marketing; they know for certain that it will turn a profit.

Stretching the Value of A Low Google AdWords Budget

The majority of our small-business clients do not have $2000 per month to invest in AdWords marketing. On average, they are hoping to spend only around $500 per month, at least at first.

If that sounds like you, and you are uncertain how to possibly make your budget work, we can provide a few suggestions:

• Optimize Your Ad’s Landing Page

Google takes two factors into account when deciding how high your advertisement ranks:

Quality Score – Google ranks your advertisement’s landing page (where viewers go when they click your ad) as well as how relevant your ad content is to the keyword you associate it with. The better your landing page and more relevant your keywords, the higher Quality Score your ad will earn.

Maximum Bid – While Google will make suggestions on how much you should bid on a search term, you can control the maximum amount you are willing to pay. All things being equal, if a competitor is willing to pay $2.50 on a keyword, but you are only willing to pay $2, their ad will rank higher.

Combining these two factors, if you have a higher Quality Score (meaning a highly relevant ad and a fantastic landing page), then you can get away with paying less per click. Even if a competitor bids higher than you, if their ad and landing page are of low-quality, you will still rank higher.

A great landing page will be extremely relevant to the advertisement. Your website’s homepage is not sufficient. If you are trying to sell carpet cleaning services, your landing page should direct viewers to a specific page about your carpet cleaning service with a clear, obvious way to contact you about them.

The above landing page is a great example: Quickly shows what they offer, why it’s better, and how to get started.

• Do In-Depth Keyword Research

If you are looking to avoid paying for the highest-competition keywords, you will be required to put in some time researching keywords. Taking the time to figure out what the traffic and costs for “maid services” are compared to “house cleaning services” has the potential to save you a great deal of money. See our previous post on Keyword Research for more information on this step.

• Target Specific Locations

When you have a low budget, every click that isn’t from a qualified prospect takes a lot away from the success of your campaign. To counteract this, think about where, physically, your best prospects are located.

For instance, if you provide legal services for the state of Ohio, specify during ad creation that you only want your ad to show up in searches from Ohio residents. If you only deal with national clients, target only the United States.

It is possible to get even more specific. If you only service Durham, Raleigh, and Chapel Hill, you can only target residents there as well. Often the businesses with small budgets primarily service their local area, so this is an integral feature to take advantage of.

• Give it Time 

With a lower budget, you will see a lower volume of clicks – and thus a lower volume of data you can use to optimize your ads. This is why most AdWords services will not work with clients whose budget is under $1000 – you will fail to see many results in the first few months, which can reflect poorly upon them.

We suggest meticulously keeping track of where your new sales or clients are coming from – you will want to see exactly how much each AdWords client is bringing to the table so you can adjust your strategy accordingly.

AdWords and other PPC services are daunting to navigate at first. If you have any questions about your business’ budget or current campaigns, leave us a comment or give us a call to discuss your options.