How Much Should You Spend on Google AdWords?

One of the most frequent questions I receive about Google AdWords is, “How much should I be spending on my AdWords campaign?” That’s a great question, and the short answer is, “It depends.”

Editor’s Note: Don’t miss Phil Frost’s upcoming webinar “Old School SEO Is Dead: What you can do to adapt to Google and the new world of search marketing,” live on February 25. Click here to register.

One of the most frequent questions I receive about Google AdWords is, “How much should I be spending on my AdWords campaign?” That’s a great question, and the short answer is, “It depends.” One of the great things about AdWords is that it is highly customizable, allowing you to make the decisions that best fit your business needs. The downside is that it is not easy to see at a glance how best to manage your AdWords budget.

Fortunately, we have developed a formula that allows you to plug in your numbers and calculate a realistic budget. It breaks down into two phases: Testing and ROI.

Phase 1: Testing

When you begin your Google AdWords campaign, you will need to test several ideas to see what works for you and what doesn’t. While some campaigns are profitable right out of the gate, many others are not. Consider your testing phase to be a form of market research, and plan to invest those dollars without the expectation of getting them back.

Before you begin, gather the following information:

  • Target Keywords Cost Per Click (CPC): Google AdWords follows a pay per click (PPC) model. No matter how many times your ad appears, you only pay when a prospect actually clicks on it. For each keyword, you will pay a different amount of money for that click. This is known as the CPC, or cost per click. For example, Google estimates that “coffee shop” costs $2.90 per click, while “mortgage broker” costs $13.76.

Make a list of the keywords that you want to test, and then use the Google AdWords Keyword Planner Tool to estimate the CPC for each of those keywords. Remember that this is just an estimate, so your actual cost may be higher or lower.

  • Time Frame: How long can you spend in the testing phase before you need to see your results? This is partly dependent on your industry and the keywords you choose. Some keywords have a higher search volume than others, making it easier to get results in a shorter time frame. Also consider your normal sales cycle. Do customers tend to purchase in one day, or does it take months for them to make up their minds? The lower your search volume and the longer your sales cycle, the longer it will take for you to obtain accurate data.
  • Sales Conversion Rates: As a general rule of thumb it’s safe to estimate that 1 in 100 people (1 percent) who view an AdWords ad will click on it, and 1 in 100 clicks (1 percent) will convert into a paying customer. These are estimates, and your ads might drive more or less traffic, but they work for planning purposes in the testing phase.

Now you are ready to put together your testing budget:

  • Per Keyword Cost to Test: If you can turn 1 in 100 clicks into a customer, then the estimated cost per sale is the cost per click (CPC) divided by 1 percent. For example, a keyword that costs $3 per click will cost you an estimated $300 for one sale. Go through the same process for each keyword you want to test, and add up the results to get your total budget.
  • Monthly Testing Budget: To generate a per-month Google AdWords budget, divide your total keyword costs to test by the number of months you want to allot to the testing phase. For example, if your total costs calculated earlier are $2,000, then you could budget $500 per month for 4 months. Or if you wanted to test faster, then $1,000 per month for 2 months.

Phase 2: ROI

Once your testing phase is complete, and you have generated a handful of sales from your ads, then it’s time to move into the ROI phase. The goal here is obviously to maximize return on investment from AdWords.

What should your budget be in the ROI phase? If your ads are profitable, then the answer is you should ditch your budget altogether! If every dollar you spend nets you more than a dollar in sales, it only makes sense to invest as many dollars as possible.

While many businesses focus on writing better ads, which improves the AdWords quality score and reduces the cost per click (CPC), that’s only half of the equation. The real magic comes from the EPC, or earnings per click.

To find your EPC, just multiply your customer value times your conversion rate. Your Customer Value is the average amount that one customer spends on your product or service minus your fulfillment costs. Your conversion rate is the percentage of clicks that become paying customers. So if the customer value is $100 and you have a 1 percent conversion rate, your EPC is $1.00.

Why Is EPC so important?

Well, it tells you exactly how much you can afford to pay per click for every single keyword in your account! If you pay more than your EPC, then you’ll be unprofitable. If you pay less, then you’re profitable. It’s as simple as that.

That means the key to AdWords success is to maximize your EPC by increasing both your customer value and your conversion rates.

Google AdWords is a highly customizable and extremely powerful advertising network, but it can be a bit overwhelming for newcomers. That’s why I put together an AdWords checklist to help you get your campaigns set up for success. Click here to get my Google AdWords checklist.

How Big Is Your Vision?

Way back in the Internet dark ages of January 1996, Bill Gates wrote about and coined the phrase “Content Is King.” He was talking of course, about Web content and the need for people and organizations hoping to monetize the Internet to consistently produce fresh and relevant topics in order to gain the interest and loyalty of viewers, just as television had been doing, radio before that and print media the longest of all. His assertion that “over time, someone will figure out how to get revenue” from Internet advertising is frighteningly similar to today’s gurus predicting much the same in regard to social media marketing. Just as back then—when companies and marketers struggled with deciding whether a Web presence was needed—today there are still major corporations only testing the social media waters, even if only half-heartedly, to keep pace with competitors.

Way back in the Internet dark ages of January 1996, Bill Gates wrote about and coined the phrase “Content Is King.” He was talking of course, about Web content and the need for people and organizations hoping to monetize the Internet to consistently produce fresh and relevant topics in order to gain the interest and loyalty of viewers, just as television had been doing, radio before that and print media the longest of all. His assertion that “over time, someone will figure out how to get revenue” from Internet advertising is frighteningly similar to today’s gurus predicting much the same in regard to social media marketing. Just as back then—when companies and marketers struggled with deciding whether a Web presence was needed—today there are still major corporations only testing the social media waters, even if only half-heartedly, to keep pace with competitors.

For me, however, two lines in the Gates vision statement take on a slightly different connotation than his thoughts on content: “The definition of ‘content’ becomes very wide” and “Over time, the breadth of information on the Internet will be enormous, which will make it compelling.”

I read those two lines and what immediately strikes me is the overwhelming amount of data being generated during these last 17 years and how it is being captured, nurtured and put to work in areas such as Lead Generation, Brand, Affinity, Cross-Channel and Retention marketing. If at all.

IBM has an infographic regarding the flood of Big Data they use in demonstrating how their Netezza device handles integration for several major marketing organizations. This shows how, with connectivity, speed and bandwidth issues having become nearly eradicated during just the last two to three years, the amount of collectible, actionable data has exploded.

Unfortunately, the amount of irrelevant and useless data being collected is even greater than the actionable data, and being able to simply store that much data, let alone begin to organize and digest it all, is a major concern for most organizations. Before even thinking about the incorporation of Big Data initiatives, there should be an organizational review of quality for the existing information held in the collective datamarts that feed the central repository used for decision-making. Long before Big Data, the issue of Bad Data must be addressed.

Whether you are a B-to-B or B-to-C marketing entity, the creep of inaccurate data is constant across every customer and prospect contact you currently maintain. Experian-QAS has a stark reality “Cost of Bad Data” infographic showing the millions of dollars lost each year as a direct result of inaccurate and incomplete contact information. Complacency and budgetary shortcuts speed the process even more. Whether it is via an in-house effort or using third-party tools and vendors to perform ongoing hygiene, the vitality of your contact strategy is not sustainable without regular maintenance.

Once secure in the clarity and accuracy of your core data, you can move on to the integration plan for all of the additional goodies sprouting up from the Big Data seeds being sewn across every outbound and inbound marketing channel being utilized. But again, more planning and decision-making is critical before just jumping in and trying to grab every nugget. Perhaps the Fortune 50- to 500-level corporations might have the resources to take this on in one massive project, but I doubt that many small, mid or even larger brands can just dump everything into a pot and begin using the information gleaned into a successful series of campaigns. In a SAS/Harvard Business Review whitepaper I read recently; “What Executives Don’t Understand About Big Data,” this quote stood out to me:

“What works best is not a C-suite commitment to ‘bigger data,’ ambitious algorithms or sophisticated analytics. A commitment to a desired business outcome is the critical success factor. The reason my London executives evinced little enthusiasm for 100 times more customer data was that they couldn’t envision or align it with a desirable business outcome. Would offering 1,000 times or 10,000 times more data be more persuasive? Hardly.”

Having the foresight to develop phased approaches for data incorporation based on both short- and long-term ROI is the most realistic approach. Using results from the interim stages provides the ability to thoroughly test and analyze and measure value, keeping the project moving forward steadily while minimizing roadblocks to the longer-term goals.

My initial recommendation for the process would be along the lines of:

  1. C-Suite leadership establish the long-term goals for organizational success and with other Senior Management develop the phases to follow based on data, budget and resource availability to be assigned through each phase.
  2. Set the expectations and build the benefits case of the project across the entire company, communicating these goals in order to coordinate the gathering and availability of resources needed from whatever silo in which they reside.
  3. Design the KPIs that will be required in determining accuracy of marketing integration of the insights being introduced during each phase.
  4. Test and Measure every step of each phase for completeness and success before moving on to the next.
  5. Build simple and multivariate test panels into marketing campaign segmentation to analyze what new data elements truly provide sustainable lift in response.

I would love to hear your thoughts.