What’s the right amount to spend on AdWords?

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AdWords is a phenomenal advertising tool for businesses. When people search on Google for your product or service, an AdWords campaign can show your ads to those exact people, right when they’re searching.

At Duoplus we run many AdWords campaigns for clients, so I’m often asked: “How much should we spend on AdWords?”

The question may sound like an obvious one, but it’s actually the wrong question.

Last week I had this exact conversation with an existing client. Their AdWords campaign was “limited by budget” – which means that the campaign was regularly hitting its maximum daily budget, and then the ads stopped showing for the rest of the day.

If your campaign has exhausted its budget by lunchtime, then anyone who searches for your products or services that afternoon and evening won’t see your ad. Instead, they’ll only see your competitor’s ads. So being “limited by budget” means that many people searching for what you offer won’t find you.

The client naturally asked me: “Well, what budget would you recommend?”

The easy answer is “More than your current budget.” But that only applies if you meet specific criteria.

The real way to know how much you should spend on AdWords comes back to knowing your numbers.

If a lead from AdWords costs you $30, and on average you get one sale from every four leads, then AdWords is costing you $120 per sale. If your average sale is worth $1500 with $700 profit, then it is costing you $120 to generate $700. If that was the case, what is the right amount to spend on AdWords?

If you have a scalable product-based business, which short delivery timeframes, then the answer should be: “Spend as much as you can.” As long as your campaign was carefully monitored to ensure it maintained performance while scaling, then you could boost your budget as high as you can and scale your business to new heights.

It is likely however that there will be some other constraints in your business that make infinite scalability unrealistic.

For product-based businesses the restraints might be due to manufacturing or importing timeframes, or cashflow constraints for buying enough stock. Scaling a campaign enormously doesn’t make sense if it means selling out of stock and having to wait until the next shipment to arrive in eight weeks.

For serviced based businesses the restraint is often time/staff based. What is the maximum number of jobs you can take on? Do you plan to hire more staff to grow capacity? Can you find enough skilled staff to grow?

One of our electrical clients deliberately scaled back their AdWords spend when they lost one of their sparkies. During that time their campaign was “limited by budget” but it was intentional – they knew they couldn’t cope with more work just then. Once their new team member had started, they lifted the budget again because they knew they had capacity to handle more jobs.

The crucial component that is needed when deciding how much to spend on your AdWords campaign, is to have clear tracking of where your leads are coming from. When you know how profitable your AdWords campaigns are for your business, you can increase your budget with confidence.

If inquirers regularly contact your business by phone, then, to have clear measurement of your cost per lead, it is important to have phone call tracking with your AdWords campaign. By using automated tracking for both your web form submissions and your phone calls that come from AdWords campaigns, you can easily know, down to the cent, how much it costs to generate a lead from AdWords.

By recording which of your leads come from AdWords, you can measure their sales value, giving you data to make powerful decisions that can help you scale your business.

So, what is the right amount to spend on AdWords? With the right tracking you can know exactly how profitable it is, and from there you can decide how much you want to grow, and then scale your budget accordingly.

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Josh Moore