How does Google PPC Adwords budget work? Basic explanation of adwords budgets

Adwords is a product (advertising service) by Google. You can compare Google adwords to flying an airplane. There are many, many dials, options, buttons and settings to choose from. You could start flying in calm weather. After flying for a while you could hit a BIG storm! This makes Adwords a powerful advertising channel as your time to get an advertising campaign running is extremely fast. It is bit more complicated to get working right.

This post looks only at the basics of an Adwords budget. This includes cost per click (what you pay when someone clicks on your advertisement), conversion rates and your competition. An advertising budget is one of the first steps when you decide to advertise using Google Adwords. 

For today we will look at the PPC (pay per click) option on Google Adwords (there are others ie advertising on the display network).

Background: To explain we will use an example, or scenario. This helps with some finer detail. Lets say you are in the construction industry. There are 10 competitors in your market (most markets have a LOT more than just 10). Google adwords uses a bidding system. This means you are bidding against other players in the market for the ads shown. Because of the bidding system there are consistent changes. 

You have a website. You are interested in getting more traffic to your website. More traffic could mean more leads (important, if your site is not built to generate leads more traffic might not result in more leads).

Getting leads from traffic is called conversions. This means, from the traffic to your website, a certain percentage turns into leads. 

The first step is to create a list of keywords that will be important for you. 

Two very important factors about deciding on keywords:

  1. Some keywords have a lot of volume (there are a lot of people searching, others have less volume - not many people searching).
  2. Not all keywords cost the same (some keywords are more expensive than others - typically the keywords where there is money being made cost more or when there is a lot of competition - this has a major impact on your budget).

From the research we determine there are 35 keywords. We can group these into 3 specific services you offer.

  • Group 1: Home Renovations
  • Group 2: Ceilings and Drywalls
  • Group 3: Painting

Google also shows us how much we expect to pay for keywords in each group (below are examples on an average cost per click - we will only know for certain how much the cost per click will be when we go into the market - going into the market is when your Google advertising campaign goes live):

  • Group 1: Home Renovations - R15 per click 
  • Group 2: Ceilings and Drywalls - R20 per click 
  • Group 3: Painting - R25 per click 

The above means, you do not pay for your advertisement to show on Google ... ONLY when someone clicks do you pay. That is what you want. You are only paying when people take action.

The next step is to determine a budget. Your budget is impacted by a couple of factors:

  1. The value of a transaction: If you get a job to renovate a home, and your average income is R100 000 on the job, with a GP of 40% ... this means you pocket R40 000 per renovation or sale.
  2. What is your cost per client? If you compare your marketing costs to get a clients, how much do you spend to get a customer / make a sale?
  3. How long will a customer stay a customer? If you renovated a clients house, could there be others jobs? Or, if you get a commercial client and they use you monthly on painting, how much is that worth to you?
  4. Referrals from clients who you did work for. Most people underestimate the value of referrals because they do not know how much it costs to get a client and do not have a formal referral system in place.
  5. How long does it take to make a sale? Some sales are quick, more urgent type of sales, others take longer ... sometimes months or years.
  6. How good is your sales efforts, and follow up with people who are interested?
  7. How competitive are you in the market? Is your pricing right? Do you have something unique to offer? 
  8. What other products and services do you offer to make a sale?

Next ... we need work on a number for your budget. Important, there is a statistical tipping point for your budget. 

A statistical tiping point is where you are seeing results from your advertising budget.

Let me explain ... 

Let's say, there are 1000 searches per month, you use the Google PPC platform, get 100 clicks from your ads. From there you get 10 leads. You make 1 sale.

  • To show your 1000 searches costs you nothing. Zero.
  • The 100 clicks do cost you something. If your cost per click is R20, it will be R2000 for the 100 clicks.
  • If your site converts at 10% you will have 10 leads (10% from 100 clicks).The 10 leads will have cost you R2000. This is R200 per lead.
  • If you made a sale, the cost per sale will be R2000.
  • If your income is R100 000, and you make profit of R40 000 your ROI is 2000%. (R40 000 / R2000 x 100).

Knowing these numbers helps determine your budget.

There is a tipping point. If you spend only R1000 (this is your advertising budget): 

  • To show your 1000 searches costs you nothing. Zero.
  • The 50 clicks do cost you something. If your cost per click is R20, it will be R1000 for the 50 clicks (100 clicks x R20 per click)
  • The 5 leads will have cost you R1000. This is R200 per lead.
  • If you made a 0.5 sale, the cost per sale will be R1000 - this is the tipping point, 0 sales! You cannot make a 0.5 sale.

In the examples above we worked on a 10% conversion rate. If your traffic converts at 5% or 15% the numbers change a lot!

There is also a daily tipping point. This relates to the conversion rate, cost per click and your daily adwords budget.

After doing some work, you decide your budget for adwords is R5000 for the month. 

Google allows us to have a daily budget. This means your budget is spread over the month. 

Daily budget is determined by taking your total budget and dividing it by either 30 or 22 days. The 30 days is when you typically work daily and looking for leads on a daily basis. The 22 days is when you want your budget to be used only on working days and not weekends. 

R5000 budget:

  • 30 days: R166 per day (R5000 / 30)
  • 22 Days: R227 per day (R5000 / 22)

This means, on 30 days you will have a R166 budget per day, and on 22 days, R227 per day adwords budget.

Now we can go deeper with the numbers. We will use cost per click and conversion ratio next.

If you know your average cost per click is R20:

  • 30 days: R166 per day: This will be 8,3 clicks per day (that is 8,3 visitors per day)
  • 22 Days: R227 per day: This will be 11,35 clicks per day (that is 11,35 visitors per day)

Great! We now have the numbers for a tipping point.

If your site converts at an average 10%:

  • 30 days: R166 per day: This will be 8,3 clicks per day - 0.83 leads per day
  • 22 Days: R227 per day: This will be 11,35 clicks per day - 1,135 leads per day

Important: Remember we are not the only players in the market. In this case there are 10 other businesses! When they start bidding more the cost per click can go up. We have seen markets jump from R5 per click, to R10 per click, to R25 per click ... this in only 18 months!

Stats show most clicks are on the first page of Google. The first 4 spots gets the most clicks. There is a min bid to be on the first page of Google. If you bid below your advertisement will not be shown on the first page. If you want to be on the first page of Google, and have your advertisement shown all the time you will need a bigger budget.

If there are enough searches per day, and your competition is also advertising, the following typically happens:

  • Your ads are shown until your budget runs out. When you have HAD all of your clicks, your ads stop showing because your budget is used for the day (ads show again tomorrow). In this case on 30 days, 8 clicks per day, and 22 days, 11 clicks per day.
  • If your competition puts up a bigger budget their ads will show more
  • If your competition bids more per click they could be above you (there are a couple factors that determines this)
  • If a competitor has less budget their ads will show after yours

You also need to consider market trends. Searches are not always the same. They move up and down.

A good example is holiday accommodation. It is VERY seasonal. Searches increase and decrease at specific times in the year.

Another good example is air conditioning. There are busy times and not very busy times (summer is busy, winter not so much).

Google adwords is an effective advertising medium. You can increase or decrease your budget for more or less traffic. 

Interested in starting to advertise using Google (PPC) adwords? We can help! Contact us today.