What is a good Google Ads budget?

Google Ads have been around for a while now, and it would be considered strange if you would not use it as one of your acquisition channels.

 

Within the last few years, Google has made a lot of changes to its interface, making Google Ads friendlier to a wider audience, and since it is an auction-based tool, more players, means higher competition.

 

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.

 

Use a formula to set 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.

 

I know what you’re thinking,  it’s getting too complicated. It always is when you start something.

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.

 

I’ve mentioned goals, remember? Good. 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.

 

It all depends on your goals.

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”.

 

But let’s be clear on one thing: you won’t necessarily get 66 sales out of your $1000 budget ($1000/$15).

Why?

Because you are bidding on a lot of different keywords, and their cost per click is different, and each keywords’ conversion rate will be different.

 

“Why the hell we did all these CPA calculations!” I hear you shouting. It was done for you to know how much to spend on one keyword, to know if it is worth continuing or not.

Measure the performance of your keywords

If you have one product and only a few keywords, it’s fine. But most likely you will 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. Use Google keyword planner to find additional keywords.

 

Start small. Try out your most important and specific keywords first. Use a phrase or the exact match types to eliminate unnecessary traffic. For example, use “women’s burgundy high heels” instead of going for “women’s shoes” or “high heels”. This way you will ensure that you’re not targeting too wide and wasting your money.

 

When adding keywords, you can use a low bid, say $0.20. 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. 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.

google ads budget - bid too low

The important thing, which you should consider, is that you will have to accrue clicks for each keyword in order to determine if it converts or not. 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. But I wouldn’t worry about that. You have the CPA of $15, and usually you can’t exceed that a lot if at all.

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. 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:

 

1. Pause the keyword assuming it’s not converting;

2. Lower the bid and try again (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 received 50 clicks, spent $10 and still no sale. 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 received lots of clicks, more people visited the site, chance to purchase was higher. If no one purchased, then it might be the keyword.

 

If you received a lot of clicks during the first few days, try to run that keyword for a full week because the users’ behaviour is different on Monday compared to Saturday.

Whichever scenario you encounter, it will be easier if you will have your CPA in mind.

 

After a while you will see something like this in your account:

google ads budget

 

As you see, the cost per conversion is different. I can see which keywords are underperforming and take immediate action. I can also see conversion rate, which shows how good my landing page is at convincing the user to buy.

 

You can:
1. Lower the bids for those keywords or pause them;
2. Try to fix your landing page and in this way increase the conversion rate, which will lower your CPA.

 

 

Use a lifetime value to increase your CPA

There is a way you could increase your CPA and bid even more aggressively. In the above mentioned calculations, we assumed that each user has 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.

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 to calculate the lifetime value of your users. In simple words, how many times the user purchases your product within a defined period of time. It can be 30 days, 6 months, or more. It depends 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 find out if the user 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 came and bought again, you can double your CPA and pay $30 for each sale, as you’re sure that the next months 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 LVT use this formula:
(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months)

 

Conclusions

  1. Start by calculating your goal CPA, then it will be easier to determine if your keywords converted at a good price.
  2. If the cost per click for your keyword is not high, keep it at least for a week before taking actions, but always keep your CPA in mind.
  3. Don’t forget your landing page. You might be bringing good traffic, but your landing page might be damaging your sales.
  4. Start small. Find keywords that are very specific to your business. You will have plenty of time to go after broader keywords. Firs, make money on ad spend.

 

 

 

 

 

 

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