Setting the right budget for Google Ads

How much should you spend on Google Ads?

If you’ve not run a Google Ads campaign before now, you probably have no idea how much to set aside, and what results to expect.

Sure, there’s plenty of advice out there on how much to spend on Google Ads. But it’s largely designed to have you scratching your head, and contacting a specialist to have them work it all out for you.

Hang tight, you’re in for a treat.

We’re going to answer all the questions you’re likely to have when you’re first starting out. We’re going to share with you the processes we use when recommending budgets for Google Ads (or Google AdWords, as it was long known).

We outline steps in detail below, but here's a quick summary:

How to Calculate Google Ads Budget

  • Start with realistic goals, and work backwards. Decide how many conversions you want, and the cost per lead or return on ad spend you must meet. 
  • Use Google Keyword Planner to get the cost per click for your keywords, and Google Analytics to get your conversion rate. 
  • Total your target traffic (conversion goal*100/conversion rate), to get your budget (target traffic*average CPC).

1. Is there a minimum budget to start?

The first question most people new to Google Ads will ask is “what’s the minimum budget?”. And that’s fair enough. After all, you don’t want to spend too much trying things out and have nothing to show for it.

Yes — you’re right to be cautious.

If you’re like most advertisers new to Google Ads, you want to be convinced that it’s right for your business. And you don’t want to spend too much upfront just to find out that it’s not.

For those of you just starting out, here’s the good news: there is no minimum budget.

In practical terms though, you want enough budget to get answers to your question (is Google Ads working or not?) and you want to get your answers in a reasonable time. Because spending budget gets you data, and only with sufficient data can you see where your conversions are coming from, where you’re wasting spend, and what you can do about it.

Your first few weeks of running Google Ads will be a learning exercise. You’ll get to know the keywords and ads that are getting people who convert to your website, and how much you’re paying for each visitor.

You’re gathering data.

Set your daily budget too low and it may be weeks before you start seeing enough conversions to know what’s working, and what changes you have to make. You can’t expect quick results if your daily campaign budgets are not enough to get you more than a few clicks a day, or if your ad spend is a fraction of the typical cost you pay to get a customer.

But you also don’t want to start out with too high a budget. It’s easy to spend a lot, and quickly, especially with generic keywords and a large target audience.

Set your daily budgets too high, and you could spend more than you expected while you are still learning what works, and before you realise you need to make changes. Perhaps there are fundamental flaws in your offer or you’ve set things up incorrectly — things that you wish you’d caught earlier, without having spent so much of your available budget.

Feed Google with an all-you-can-eat budget and you’ll have to be on your toes, reacting quickly to deal with any ads and high-volume keywords that are expensive and clearly not working.

It’s best to start with a modest budget (whatever you are comfortable with), and increase your spend once you see things are working.

It’s best to start with a modest budget and increase your spend once you see things are working.

2. Get started quickly

If you are impatient to get started, the simple option is to get things going with a test budget — perhaps as little as $5-$10 a day.

Raise the amount (and consider increasing your keyword bids) if your budget isn’t getting you the impressions and clicks you need, or if you know your typical cost per conversion is high.

Simple will get you started. But as with most things in life, you’ll get better results if you put some time into research and preparation beforehand.

Being prepared includes adding negative keywords (stop words) to prevent your ads being shown for irrelevant queries, and writing ads that stand out from the competition (so that people click on them). You should also look out for lower cost but promising keywords (the less competitive long-tail keywords that get you more clicks and conversions for your budget).

Proper preparation also includes taking the time to determine a realistic test budget, with clearly defined goals you want to achieve.

Sure, the simple option we’ve already covered is enough if you’re impatient to get things started quickly. But it’s best to put time into determining a realistic test budget, with clearly defined goals you want to achieve. This is particularly important when you’ve got to win over sceptics in your company, and you want convincing evidence that all your hard work will pay off.

It’s best to put time into determining a realistic test budget, with clearly defined goals you want to achieve.

3. Aim for a profit, not for a miracle

Before we go any further, a cautionary word.

If you’re not sure whether Google Ads is right for your business, and you’re only trying it now because other advertising hasn’t worked, don’t expect a miracle.

While there are likely to be people searching for the products or services you offer, there’s usually no shortage of other companies in search results that are competing for their attention. To win their business you need to stand out, whether that’s because you have a better or different offer, great customer feedback and reviews, or some other secret ingredient that has them reaching for their wallets.

Chances are, if you’ve not had any success with other types of advertising, you’ll also struggle at making a go of it with Google Ads. Fix your site’s conversion issues first, before you test Google Ads.

Fix your site’s conversion issues first, before you test Google Ads.

4. It’s an investment, not an expense

You’ve probably noticed that we talk about Google Ads being an investment. And it is, but only if you are able to track what you are getting from your ad spend.

When you’re getting accurate reports on your campaign performance, and you know when it’s time to keep on fishing or cut bait, you will no longer be thinking of Google Ads as an expense. Instead, you know you’re investing in a new acquisition channel.

So, a quick sanity check: you have set up Google Analytics on your website, right? And you have set up e-commerce tracking and/or goal conversions?

If you haven’t, you really need to have Google Analytics set up and tracking conversions before you launch any Google Ads campaigns. You shouldn’t be simply relying on your call centre or sales reps to tell you if they think your Google Ads campaign is working.

If you already have Google Analytics on your site, be sure to connect your Google Ads account to Google Analytics.

Do this and you’ll be able to see what conversions result from your Google Ads spend; which campaigns are meeting your goals, and which are struggling. Don’t, and you’ll always be second-guessing yourself, with no clear idea as to what results you’re getting.

You really need to have Google Analytics set up and tracking conversions before you launch any Google Ads campaigns.

5. What will success look like?

Before we can determine your test budget, you should decide on the SMART (Specific, Measurable, Achievable, Realistic, Timely) goals you’ll use for your Google Ads campaigns.

When you set some realistic goals in advance, you can easily judge the effectiveness of your Google Ads campaigns. You might decide, for instance, that you want at least 50 signups at no greater cost than $60 each. Or, if you have an e-commerce site, you might aim to get 50 or more sales with a $4 or greater ROAS (return on ad spend, or sales revenue/ad spend).

Decide the specific outcome you’re after: one that’s measurable (in Google Ads and Google Analytics) and, based on past performance or how your other marketing channels are performing, one you believe you can achieve.

Your SMART goals also need to be realistic (meaning that you have the resources — the people to manage your campaigns, and you have access to sufficient budget), and timely (you will produce the desired results in the time you have allowed).

When you set realistic goals in advance, you can easily judge the effectiveness of your Google Ads campaigns.

6. The best way to pick a test budget

Where you have not run Google Ads campaigns previously and have no historical data to work from, use the following approach.

No matter whether you want B2B or B2C customers, or if you’re trying to get new leads, or sell stuff, you can determine a practical starting budget based on three important metrics:

- The average Cost per Click (CPC) for your keywords.
- Your website conversion rate.
- Your target Cost per Lead (CPL) or Return on Ad Spend (ROAS).

Let’s look at each of these, in turn; where you’ll find the information you need, and how you’ll use that data to set your budget.

You can determine a practical starting budget based on three important metrics

7. It’s not just how much you bid

With search ads, you are competing in an auction against other advertisers. Set an appropriate bid for an ad that is clearly relevant to the search term, and your ad is likely to be shown. When it is, you only pay when someone clicks on your ad to go to your website.

How much your business will actually pay for each click depends on many factors. It largely boils down to how much your competitors are prepared to pay, how much you are prepared to pay, and how likely people are to click on your ads when they’re shown.

Keyword CPCs vary widely. They vary by industry, geolocation, target audience, the searcher’s device type (desktop, mobile, or tablet), the quality of your ads, your bid strategy, ad position, and how much your competitors think a new customer is worth to them. They can even differ by time of day and day of the week. And if yours is a seasonal business, you can expect to pay much more per click in peak season.

Set an appropriate bid for an ad that is clearly relevant to the search term, and your ad is likely to be shown.

8. Bid forecasting

Google’s Keyword Planner helps advertisers eliminate some of the guesswork by recommending bids based on what other advertisers have been paying. To use Keyword Planner, you need to have a Google Ads account, and for that account to have been set up in Expert Mode (not the default Smart Mode, which does not require keywords).

To get an idea of your likely click costs, start with some example keywords you might want to use in your campaigns.

Set your target location, and Keyword Planner will provide you with rough estimates. Alternatively, if you don’t have any keywords in mind, enter your landing page URLs and you’ll get keyword suggestions with recommended bids.

Keyword Planner is not a crystal ball, however. Yes, you’ll get estimates (set a maximum bid and you’ll see projected impressions, clicks, click-through rate, ad position, average CPC). And you can get a month-by-month forecast of likely search volume for the year ahead. But, as they say, once your campaigns are up and running your experience may well differ — and 99% of the time, it will.

Keyword Planner estimates are particularly fallible when you’re targeting comparatively small markets (like New Zealand) or have a niche product or service. But they’re a starting point.

As a general rule, most generic keywords will cost you a lot less than keywords which indicate someone is ready to convert. Which means you’ll be paying less for “blue widgets” than for “buy blue widgets”. Naturally enough, that’s because all your competitors are also paying top dollar for those end-of-funnel ready-to-buy keywords.

As for brand terms, bidding on your company’s brand name has become more costly in recent years due to Google’s algorithm changes, and can now be just as costly as bidding on some generic terms. But you’ll usually pay a lot less than you will if you are bidding on your competitors’ brands.

Keyword Planner will provide you with rough estimates.

9. What will your conversion rate be?

Assuming yours is not a completely new website and you have some data to work with, Google Analytics is your best friend here.

Look at the typical conversion rates for your top pages (the same pages that you want to use as landing pages for your campaigns).

You might see that conversion rates vary widely depending on how people got to your website, and whether they’ve been to your site before. You might also see that direct traffic and email marketing campaigns have a higher conversion rate than other marketing channels.

A good rule of thumb is to look instead at the conversion rates for organic search and referral traffic; this will give you a more realistic idea of the ranges involved. Be conservative: use a low conversion rate in calculating your budget, and adjust your budget later once you have some actual data to work with.

A good rule of thumb is to look at the conversion rates for organic search and referral traffic

10. Putting it all Together

Let’s say your SMART goal was to get 50 or more signups at no greater cost than $60 each. If you determined that the average conversion rate for the pages you are going to use is 2.5% you will need to get 2,000 Google Ads visitors (50*100/2.5).

To calculate your test budget, it’s a simple matter of multiplying your target visitor number by your average CPC. Allow yourself some wiggle room — you don’t want to be asking for more budget (unless things are going far better than expected) before you complete your test.

In this example, to meet your cost per conversion target, you need to keep your average CPCs under $3. If Keyword Planner is giving you higher averages, there are steps you can take (and you might try them all).

You can lower the bids you are prepared to pay, or be more selective in the keywords you choose (getting rid of or replacing the more competitive ones).

You can also be more selective in the landing pages you are using and the products and services you are promoting, to improve your likely conversion rates.

What if your goal was to get 50 or more sales with a $4 or greater ROAS? The calculation is the same to get your test budget, but you want to make sure you are focussing your efforts on selling the right products. Start by promoting your best-sellers, but only those with an average order value high enough to meet your ROAS goals.

Allow yourself some wiggle room — you don’t want to be asking for more budget before you complete your test.

11. What if spend goes over budget?

No need to worry — you control your ad spend by setting campaign daily budgets, so you’ll never have to pay more than you allocated. Google may spend more than you have allowed in one day (and, when search volume is high, as much as twice your daily budget). But any daily overspend is accounted for within your monthly budget, and Google says it will never charge you more than you set as your monthly budget.

Your monthly budget is the sum of your campaign daily budgets multiplied by 30.4 (the average numbers of days in a month).

Google says it will never charge you more than you set as your monthly budget.

12. Are there any other costs?

Good question. We’ve been talking about your advertising spend, but there are other costs you need to take into consideration.

For starters, as of November 2019, New Zealand advertisers must also pay GST on top of Google charges.

If you’re not running your own campaigns, you also need to pay your agency’s fees. For companies that have the budget (and no internal expertise), outsourcing to professionals is the way to go. A principled agency that knows what it’s doing will pay their own way, seizing opportunities you might miss and avoiding the mistakes that inevitably occur when you’re learning as you go.

If you do decide to run your own Google Ads campaigns, at some point you may also need to invest in a paid search management platform. You’ll know when the time has come — when campaigns become too complex to manage using the Google Ads interface and Google Ads Editor.

For reporting, we recommend using Google Data Studio, and the free version should meet most needs. But there may be additional costs to consider if you choose to use something else.

Otherwise, yes — that’s it.

13. Conclusion

Now that you have your test budget, understand that your available budget should be flexible once you’ve run your test. Assuming you got the results you wanted, and perhaps even exceeded your goals, you want sufficient budget to capitalise on the opportunities you’ve discovered. Re-allocate budget from other marketing channels that aren’t doing as well, if need be. And, as you get comfortable with running Google Ads campaigns, make sure you allow some extra budget for testing out new things.

If you’re going it alone and find that you can get the results you need, that’s great to hear — we wish you good luck.

If you do decide you need professional help in running your campaigns, or if you didn’t get the results you expected, please get in touch.

Over the years we’ve reviewed literally hundreds of Google Ads accounts; some that been run in-house, many by other agencies. In the process, we’ve uncovered significant mistakes and oversights, saving the companies we’ve worked with thousands of dollars in wasted ad budget (which we’ve then repurposed to maximise sales).

Your Google Ads account could be one of them...

About the Author Jeremy Templer

Jeremy is a Partner and Senior Consultant at SureFire. Jeremy has been working in search since 1996, when he joined the Australian search engine, LookSmart. After relocating to San Francisco, he was instrumental in the development of the company’s paid search ad platform. At analytics company Coremetrics (now owned by IBM) he established an in-house search agency managing campaigns for Coremetrics clients such as Macy’s, Bass Pro and Lands End. At Acxiom he managed members of the pioneering SEO firm Marketleap and worked with clients such as Capital One, American General Finance and Kaiser Health. Joining SureFire in 2009, he is the head of Paid Search Advertising and oversees the delivery of AdWords and other PPC campaigns. He also helps clients make sense of their website data.