Most people try Google Ads because it is easy to start with but then abandon it due to the poor results. Of course, not all channels are equal, and each product or service has to find its own mix of them.
However, usually, it is the start that counts. A strong foundation makes a lasting house, right? The same rules apply to Google Ads.
In this post, I will talk about why people ten to overspend or see no results and what you can do about it.
The problem with spend
The question “How much to spend on Google Ads campaigns?” seems simple. But apparently, many people struggle to understand how much is too much. This Reddit post illustrates this:
And this is not the only one out there. Starting with Google Ads became easy, but getting results is another story. If you spend too little, you might not get the results you wanted and decide that maybe Google Ads is not the best channel for your business—a missed opportunity.
If you spend too much, you lose money, and this may not be the end for your business, but you might as well have spent it on another channel that would drive those sales.
On top of that, you need to understand how the daily budget works.
- Your daily spending limit (two times your average daily budget for most campaigns) on any particular day.
- Your monthly spending limit (30.4 times your average daily budget for most campaigns) in any particular month.
This means that if your daily budget is $10, then on some days, you might spend up to $20. In any case, during the month, it will average out and should not be more than $304 ($10×30.4= 304) if you don’t make any changes during that time.
Then, you have bidding strategies, along with industry, keywords, campaign types, and trends.
Considering everything that I mentioned, setting up a budget requires a bit more work and is not just entering a daily budget.
What’s your business goal?
Before doing anything with the budget or the account, we need to address a very important but sometimes overlooked question.
What’s your business goal?
I know that you will tell me that it’s sales, revenue, or leads. That is all great. But it’s not about your Google Ads conversion. It’s what you want to achieve with any marketing.
I have to point out that a business goal could be the same as Google Ads conversion. But sometimes, those are different, and they need to be aligned.
Basically, it boils down to a few business goals:
Profit. You spend $1000, get $3000 back, that’s $2000 profit. For simplicity, let’s assume you don’t have any expenses.
Business expansion. You sacrifice profit for new clients and future profit. Then you can spend $1000 and make $1000 and consider it good as you get more and more clients with $0 spent on ads. Some businesses operate without a profit for a very long time.
Profit based on LTV. Mostly used by SaaS businesses, but if you know you’re lifetime value, you might spend more to acquire a client, knowing that you get your money back after 6 or 12 months.
Aggressive expansion. Usually done by big companies, when they look at metrics such as share price or think about revenue only after 5 years. In this case, they spend a lot more to get as many clients as they can and later optimize. They also do that to crush competition.
So, if you have cash, you can spend more, not worrying about getting your money next month. Otherwise, you have to calculate the profit from the ads to ensure that you’re not losing money each month.
Once you know where you stand, it is a lot easier to set not only your budget but your CPA aswell.
Conversions in the account
Having a proper conversion setup in the account might seem like common knowledge, but I’m biased. I still see people running ads without conversion actions or with poor ones.
The easiest way to waste your money is to run campaigns without a proper conversion.
I’ve mentioned conversions in many posts and don’t want to repeat myself. Besides, some people know this, so I don’t want to make this article longer. Here are the posts that will help you with setting up conversions:
How to create conversion with Google Tag Manager
A post on enhanced conversions
Blog post about micro and macro conversions
This is more than enough to cover conversions.
How bidding impacts your costs
The bidding strategy you choose can impact your costs, especially if you choose any of the automated bidding strategies. I’m not going to compare which one is better; just highlight what you need to have in mind. Want to learn more? Read this post about bidding strategies.
Manual CPC
You control the CPC of each keyword. This is the highest level of control. In some cases, with a limited budget, this is the best strategy to start with.
Maximise clicks
You’re telling Google to get the most amount of clicks for your set daily budget. Here it’s less about overspending, but more about getting quality clicks. More is not always better.
CPA bidding
You set the price for each conversion. That is a good strategy once you calculate how much you can spend and you’re actually getting enough conversion for Google to learn.
Also, if you choose to pay for conversions, there is no daily spending limit, but the monthly average should be the same: 30.4 times your average daily budget.
ROAS bidding
I’m not a fan of measuring ads with ROAS. It shows the return on ad spend, which is not a full picture. As mentioned before, you have your margin, you have ad costs, and you probably have other expenses.
My advice is to calculate what ROI (or ROAS) you need to be profitable and take it from there.
For example:
Selling price$100
cost to make $50
$20 additional expenses (taxes, etc.) (can be ignored)
Profit is $30.
If you spend $100 to sell that product, your ROAS is 1, but your profit is -$70.
Your ROAS should be at least 3 just to break even (+/-) and >3 to make a profit from ads. In other words, you need to spend $100 and make 4 sales, (4x$100) – $100 – (4x$70)= $20 profit. That’s a ROAS of 4. In Google Ads, you have to specify 400%.
Setting your Google ads budget
When you build a house, you have an expectation of the result. You also have a plan. You know how many bedrooms you want, or what will be the size of your kitchen. But what expectations should you have when you start advertising? What goals should you set? Well, that depends on your product or service.
If you think, that you will spend $1000 and see what happens, I can tell you one outcome right now: you will lose $1000. Let’s say you make 2 sales, is that good? What about 10 sales? Is that better? If your product costs $500, then 10 sales is great. But if your product costs $100, it’s not that good.
You could think, “At least I got my money back from spending $1000 and selling 10 products for $100”. No, unless you got those products for free. Otherwise, there is a margin to consider.
Let’s consider the easiest scenario. You want to advertise on Google Ads to increase your revenue. In simple words, you want to earn more than you spend.
There is a formula to determine how much you can spend on one product without burning too much.
CPA=(C*M)*S
CPA – cost per acquisition
C – product price
M – product margin
S – the percentage of margin you want to spend on acquiring new sales.
I don’t like dry formulas, so let’s use an example.
Suppose your product costs $100, and your margin is 30%. So, you will make $30 of profit from each sale. The most common amount you want to spend on the acquisition is 50%. So, we have:
CPA= ($100*30%)*50%=$15
This means that 50% of your profit goes to acquiring new sales, and the other half goes into your pocket.
Your daily budget:
- You should set it at around $15 as you want to get 1 conversion per day or around 30 per month (Google recommends).
- set $30 to get more conversions as algorithms learn faster and are more precise.
Spending 50% of your margin is a safe way because you will be making money and at the same time increasing your sales.
What if you want to capture a bigger market share, and you want to do it faster? Then you can be more aggressive. Spend 80%, or even 100% of your margin to acquire new sales. Just make sure you have enough money in your bank account.
If we get back to that $1000 you wanted to spend.
Since you know how much your product costs, it’s a bit easier for you to set your expectations and goals. Now you can say, “let’s spend $1000, and if we will get at least 60 sales, I will be happy”.
Use your own number to calculate how much you need to spend to get conversions.
I made a simple calculator you can use to see what results you can expect depending on various factors. I also added a video explaining how to use it.
💡Quick note: Setting a budget based on CPA does not guarantee conversions. Many factors influence conversions, including your landing page, product price, etc. The calculations we did help you understand how much you should expect to spend per month to see if the keywords convert.
Use a lifetime value to increase your budget
Another way you could increase your CPA and, in turn, increase your budget is by using Lifetime value (LTV). In the above-mentioned calculations, we assumed that each user had purchased only once, and you need to make a profit on each purchase. But if your product is good, there is a big chance that users will come again and buy a second or a third time. Or you have a subscription business, where people pay you a monthly or yearly fee.
If that’s the case, then you can acquire those users for a higher price, knowing that you will make your money back when they buy again.
All you have to do is calculate your users’ lifetime value. In simple words, this is how many times the user purchases your product within a defined period of time. It can be 30 days, 6 months, or more, depending on your product and sales cycle.
If you are just starting, you won’t know how many times your user will buy again. You will have to wait at least a month or a few months and then check if the users who purchased the first month will purchase again during the next few months.
Let’s say you’ve just started, and it’s your first month. You sold 100 products at a CPA of $15. If, during the second month, all users come and buy again, you can double your CPA and pay $30 for each sale, as you’re sure that the next month, you will get your money back.
Of course, this almost never happens. You need a longer period to see how loyal your users are. You can learn as you go and adjust your CPA each month when you will have more data.
To calculate basic LTV, use this formula:
(Average revenue per purchase) x (Number of Repeat Purchases) x (Average lifespan).
The average revenue per purchase – in our case, it’s $100
Repeat purchases – 1.2
Average lifespan – 6 months
Let’s take the same example of a $100 product. You also know that, on average, about 20% (or 1.2) of people come back and buy again in the coming months. That usually lasts about 6 months, and then people start to drop off, meaning they rarely buy after that.
So:
$100 x 1.2 x 6 = $720
This is a very basic formula, as you can add more metrics, such as acquisition costs (CAC) and retention rates.
💡Note. Repeat purchases in the example are calculated on a monthly basis; that’s why I multiply additionally by 6. If you take 6 months and you see that during this period, only 20% of people purchased again, then your LTV is only $120 ($100 x 1.2)
Be careful not to inflate your lifetime value, as this might burn your revenue. It’s better to be more conservative. Keep it simple.
Looking at LTV, even within a short period of time, can give you a significant advantage. If only 20% of people buy again, this still gives you the chance to increase your CPA by 20% along with your budget. This may mean more sales, better ad positions, and maybe more keywords or campaigns.
Measure the performance of your keywords
If you have one product and only a few keywords, it’s fine. But you will most likely have anywhere from a dozen to a few hundred keywords. The more keywords you have, the harder it will be to keep track of them.
Sidestep: Google keyword planner to find additional keywords.
What happens with less experienced businesses is they tend to add a lot of keywords. It’s either due to their boss, the agency or Google’s recommendations. This could be a big mistake, as you will spread thin your budget and not get any results.
One of the best ways to avoid overspending and see if Google Ads fits your business is to try out your most important and specific (long tail) keywords first. Use a phrase or the exact match types to eliminate unnecessary traffic. For example, use “women’s burgundy high heels” instead of “women’s shoes” or “high heels.” This way, you will ensure that you’re not targeting too widely and wasting your money.
When adding keywords, you don’t need to increase bids to the recommended amount. When the keywords are in the account, Google Ads will help you by showing if your bid is good enough or too low. You shouldn’t panic if you see that the bid is too low. You still might get traffic that converts. It can appear on the first page, but it won’t happen as often as possible, and you won’t get a lot of clicks.
The important thing to consider is that you will have to accrue clicks for each keyword in order to determine whether it converts. So, when the bid is lower, it will take longer, and if you increase the bid to a suggested price, you will get more clicks faster.
It’s hard to say how many clicks you need for each keyword. How many users need to see your product for at least one to convert?
Let’s look at a couple of scenarios.
Scenario one
The cost per click for one of your keywords is $2. If you get 8 clicks, that’s already $16. Your desired CPA is $15. Are 8 clicks enough to sell your product? Maybe. If you continue bidding on this keyword, it will cost you more than you earn.
If you started with specific keywords, you will have two options:
- Pause the keyword, assuming it’s not converting (you already spent $16);
- Lower the bid and keep it for a little longer (you can dip into your margin if you think this keyword should convert).
In both options you have to look at the keyword and ask yourself “does that keyword relate to my product as much as possible?”. If it does, why it’s not converting? Maybe it’s the landing page?
Don’t forget that the landing page is responsible for your conversion. The keyword and the ad did their part by attracting a potential buyer.
Scenario two
In the second scenario, let’s assume that your keyword costs $0.20. You receive 50 clicks, spend $10, and still have no sales. You can keep spending until you hit $15 (as this is your CPA) and then decide what to do with it. In this scenario, it’s easier as you receive lots of clicks, more people visit the site, and the chance to purchase is higher.
If no one purchased, then:
- look at the keyword again and evaluate if it really represents what I’m selling.
- if it does, then look at your landing page. 50 clicks does not equal 50 users, but it may be enough to see that something might be wrong with your landing page.
- Additionally, check the CTR; if it’s high enough, then your ads are OK. If keywords are directly related to your product, then it’s most likely something on your landing page.
If you receive a lot of clicks during the first few days, try running that keyword for a full week because users’ behaviour is different on Monday compared to Saturday.
Whatever scenario you encounter, it will be easier if you keep your CPA in mind. You don’t want to overspend on any keyword unless there is a really good reason to do so.
After a while, you will see something like this in your account:
As you can see, the cost per conversion is different. I can see which keywords are underperforming and take immediate action. I can also see the conversion rate, which shows how well my landing page convinces the user to buy.
You can:
- Lower the bids for those keywords or pause them;
- Try to fix your landing page and, in this way, increase the conversion rate, which will lower your CPA.
By using the methods I described here, you should be fine with your daily budget setup and not worry too much about overspending.
💡Final note. None of this guarantees that you will get conversions. This is not about that. This is about setting your daily budget and CPA and minimizing overspend. If you do everything correctly, then you know, you have not just wasted your budget but you learned what’s working and what’s not.
Whenever you’re ready, there are 3 ways I can help you:
- Book a call with me. During a 1-hour call, we can go through your account and identify growth opportunities or do a quick audit to see what can be improved instantly. Short call, big gains.
- Get my book “The Google Ads Playbook”. It’s almost 300 pages on how to create, manage and optimize campaigns. If you’re just starting out, you will get massive value out of it. No fluff. No BS. No basic information. Nothing held back.
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