How Much Should I Spend On AdWords?

This is one of the most common questions we get asked and also one of the hardest to answer. There are a lot of factors in determining how much you should be spending on your Google AdWords and I’m going to discuss a few of them here.

Setting Your Daily Budget

daily-budget

If you have absolutely no idea where to begin the Google traffic estimator is a good place to start. Once you have your keywords you can plug them in to the traffic estimator and Google will give you an estimate for position, volume of clicks and total daily ad spend for a bid that you provide (you can play around with a few different bids here to get an idea of how much difference the bids will make).

traffic-estimator

Disclaimer: The traffic estimator is definitely not 100% accurate and should only be used as a rough outline for where to set your daily budget limit for your campaigns.

How Much Should I Bid?

It is extremely easy to lose money on AdWords if your bidding isn’t well thought through. The most important thing to figure out is how much you are making from your different keywords and use this to guide your bids. To find out the maximum bid that is still profitable you will need to know the conversion rate of the keywords and the profit per sale.

If you’re running a brand new campaign then you will need to use an estimate for your conversion rate and come back to the calculation when you have some data.

Taking the example of a shop owner selling goods online, there are some very important metrics to know before we can answer the question on how much to bid:

Conversion rate = sales / clicks (How many of your clicks turn into actual sales?)
Profit per sale = average order size x profit margin

Armed with this information we can now figure out the maximum price we can pay per click and not be losing money:

Max bid = conversion rate x profit per sale

Time for an example….

Looking at the conversion tracking data from my campaigns I can see that 4% of my clicks are becoming sales. My average order value is $150 and there’s a 25% margin on my products.

Max CPC = 4% (conversion rate) x $150 (average order value) x 25% (margin)
Max CPC = $1.50

The most I can spend per click and not be losing money is $1.50.

Total Profit

In the example above, if I pay $1.50 per click I will break even on my AdWords campaign. This is not exactly ideal and the only one you’ll be making happy would be Google!

The less you pay per click the higher your profit per click will be but profit per click is not what we want to maximise – we want to maximise the total profit of the account.

If I pay $0.05 per click I will receive a huge profit per click but the chances are I’m not going to be getting many clicks. To find the highest total profit we need to be balancing the profit per click with the volume of clicks the campaigns are generating.

Given the number of factors involved in this balance (quality score, bid price, cpc, conversion rate, position, Google’s algorithm) it is not possible to give a perfect answer.

This problem becomes more complicated when we start to factor in the fact that my conversion rate is different across different keywords. What if my shop sells a wide variety of different products all with different profit margins?

Here it starts to get complex and unfortunately there is no simple way to manage accounts like this. Time is needed to set this up but that doesn’t mean it should be ignored! Setting AdWords campaigns with the ability to measure the total profit at keyword/product level means that you will be increasing your ROI and you’ll be able to blow your competition out of the water!

Tweak Your Bids

The answer is tweaking your bids and ensure you bid below $1.50. I would suggest starting with a bid at 50% of your maximum and measure the results. So if we were to bid $0.75 we know we are not going to be breaking even, but we are likely to receive a steady amount of traffic to the website.

keyword-bid

From here we can begin to look at conversions for individual keywords and even start to modify bids based on the conversion rate of individual keywords. The best way to get started it to setup AdWords conversion tracking or import your Google Analytics goals.



  • http://cellfonead.com/ Paul Seymour

    I agree pay-per-click is an effective method of promotion, try asking a publication or broadcast station to show your ad. without paying, saying you’ll just give them a small payment every time someone responds. You can imagine the reaction!
    The problem with Google adwords is that it is so expensive. The fastest growing method of viewing the net is via a mobile device and pay-per-click via mobile marketing is even more effective, even more targeted and a fraction of the cost of adwords. CellFoneAd.com

  • Abundant Journeys

    Thank for you the information. Bottom line, I am getting the picture it takes a couple thousand dollars investment per month to test, tweak ,then prime your account enough to begin to make sales from adwords. Do you agree this is the case?

  • http://www.blogger.com/profile/10418367156722243152 Benjamin Mangold

    Hi Abundant Journeys,

    Generally, yes, we would recommend that two thousand dollars per month is allocated as a starting point.

    However, it will ultimately depend on the particular keywords you are bidding on and also on how you are targeting your ads. For example, targeting an individual city can run using a smaller budget.

    Regards,
    Benjamin

  • http://www.blogger.com/profile/17520222537630613434 Td

    I have run out of Goals? How do I make more – do I have to pay for them

    Thanks

  • http://www.blogger.com/profile/02365987324070201007 kinginr

    Thanks for the information about Adwords. I have searching for this. I am planning to start Adwords campaign for my site eastindiaguide.in and I know how to start.

  • http://www.coronecolodge.com/ Coron Hotel

    been searching the net for information about adwords on how we can market our new hotel without spending a lot of money. thanks for this useful info.

  • http://defiantmarketingsolutions.com/ Isaac Guzman

    I am going to be opening a gym and this information is great to help me estimate the costs of advertising. Thanks

  • Anonymous

    Google adwords can be effective, as this article shows. However, Google has evolved and so have we, as users. We now have instant search…actually it simply finds what I’m looking for vs. searching. 78% of users never click in the adwords portion of the page, they actually click in the organic section first. You’re best bet is to do a small amount of Google adword advertising mixed with a display campaign on referral sites that brand you url. The URL is used when a customer goes from a lead to a conversion.

  • http://dateolicious.com/ Mike

    Anonymous and the article has provided great information on helping me with my Adwords campaigns.

  • Val Johnson

    Can’t play too conservatively when you’re doing PPC. You have to bid to win that traffic. You should be receiving >90% impression share of the keywords you are bidding on and that means bidding a little higher sometimes. What happens is that you have to have an optimized sales process to justify the ability to bid higher. If you make more per sale, you can bid more per click, and squash your competition. My buddy Simon would be willing to help anybody that wants help with their PPC campaigns, just give him a call. His number is 240-455-3886.

  • John Smith

    Does this work with smaller sales? If we expect a customer to spend roughly £15, and about (Using your example, since we don’t have an estimate yet) 4% clicks become sales, and our margin is 40% (this is our highest, most are 20-30%) then my max bid should be £0.24 but the recommended bids for our keywords are £1-£2. This doesn’t seem feasible to me…