Google Advertising: How Much to Spend on Ads

If you’ve attempted to run Google ads on your own and you’re not seeing a healthy ROI, we’re here to help. Getting the results you want involves knowing how to tweak your budget effectively, which is where we can step in and help guide you.

How much do you spend? How do you calculate your ROI? How many conversions should you assume?

In this article, we break down the costs you should consider when advertising on Google, including real numbers and insight into our expert assumptions.

 Let’s get into it!

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Determining Your Budget

The first step in launching a successful Google Ads campaign is determining how much to spend. It’s probably the first question you asked yourself. While there's no one-size-fits-all answer to this question, several factors should be considered:

1. Business Goals: Consider your business objectives and what you hope to achieve through Google Ads. Are you looking to increase website traffic, generate leads, or drive online sales?
2. Competitive Landscape: Analyze your industry's competitive landscape to understand how much your competitors are investing in Google Ads. This can help you gauge the level of investment required to stay competitive.
3. Available Resources: Assess your financial resources and allocate a budget that aligns with your overall marketing budget and business objectives.

Utilizing Google's Budget Planning Tool

Google offers a powerful budget planning tool that can help you estimate the potential impact of different budget levels on your campaign performance. By inputting your desired campaign objectives, target audience, and budget constraints, you can gain valuable insights into the expected results of your Google Ads campaigns.

Determining Click-Through Rate (CTR) and Impressions

Whether you’re determining your estimated impressions or CTRs yourself or letting Google’s Planning Tool do it for you, you may want to consider hedging the numbers by as much as 25% to ensure that you are making conservative assumptions.

CTR

Click-through rate (CTR) is a critical metric in determining the effectiveness of your Google Ads campaigns. While the average CTR can vary significantly depending on various factors such as industry, targeting, and ad creatives, it's essential to establish realistic expectations for your specific business type. Here are some examples of assumptions for CTR for both B2B and B2C businesses:

B2B Business: For B2B businesses targeting specific keywords related to their industry or niche, a reasonable CTR assumption might range from 2% to 5%. Since B2B audiences are typically more selective and research-oriented, achieving a higher CTR may require highly targeted ad copy and relevant landing pages. You’ll have to determine how conservative you want to be with these assumptions. We suggest, for new campaigns, to be as conservative as possible. So, if you have no data to support an exact CTR, assume 2%.

B2C Business: B2C businesses targeting consumers with products or services may expect higher CTRs due to a potentially larger and more diverse audience. A reasonable CTR assumption for B2C search ads might range from 3% to 8%, depending on factors such as ad relevance, competition, and targeting criteria.

It's important to note that these are general guidelines, and actual CTRs may vary based on specific campaign variables and industry dynamics. Continuous monitoring and optimization are essential to improving CTR and maximizing the performance of your Google Ads campaigns, regardless of your business type.

Impressions

Estimating impressions for Google Ads involves understanding your target audience, keyword selection, and search volume within your industry. While it's challenging to predict exact impression numbers, especially considering factors like competition and search trends, you can make informed assumptions based on historical data and industry benchmarks.

Here are some example assumptions:

Scenario: A B2B software company offering project management solutions targeting small to medium-sized businesses. 

Note: You can find the information below on SEMRush or other keyword software. Google also offers a Keyword Planner that provides these insights.

Keyword Selection: Selected keywords include "project management software," "task tracking tool," and "team collaboration platform."

Search Volume Analysis: Based on keyword research, the combined monthly search volume for selected keywords is estimated to be around 10,000 searches.

Competition Analysis: Moderate competition is observed for selected keywords, with an average Cost per Click (CPC) of $5.

Budget Consideration: With a daily budget of $50, assuming an average CPC of $5, the estimated daily clicks would be around 10 (daily budget ÷ average CPC).

Impression Assumption: Assuming a conservative click-through rate (CTR) of 2%, the estimated daily impressions would be around 500 (daily clicks ÷ CTR). If you are running a 30-day campaign, that puts your monthly impressions at 15,000. If you want to remain conservative, hedge the impressions a bit. In this scenario, you could assume 10,000 impressions. 

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Defining Customer Acquisition Cost (CAC) and Lifetime Value (LTV)

Calculating customer acquisition cost (CAC) and lifetime value (LTV) is essential for determining the profitability of your Google Ads campaigns. CAC represents the cost of acquiring a new customer through your advertising efforts, while LTV estimates the total revenue a customer generates over their lifetime.

To calculate CAC, divide the total cost of your Google Ads campaigns by the number of new customers acquired during a specific period. To calculate LTV, multiply the average purchase value by the average number of purchases per customer per year and the average customer lifespan. 

The lifetime value may only be one purchase for your business. If you have recurring purchases like subscriptions, assume a one-year LTV (12 months of billing). We like to see an LTV to CAC of at least 2. If we are below that, we need to adjust some of our advertising levers.

CAC = total cost of campaign/number of new customer

LTV = customer value x avg customer lifespan

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Assuming a Churn Rate

Churn rate refers to the percentage of customers who stop using your product or service over a given period. To account for churn when calculating LTV, subtract the churn rate from 1 and multiply the result by the average customer lifespan. 

Churn Rate = (Customers Lost During the Month / Total Customers at the Beginning of the Month) x 100%

Understanding churn rate is essential when advertising on Google because it directly impacts the return on investment (ROI) of your advertising efforts.

Here’s an example:

Scenario: A software-as-a-service (SaaS) company offering project management software with a monthly subscription model.

• Total Customers at the Beginning of the Month (B): 1,000
• Customers Lost During the Month (L): 50
• Total Customers at the End of the Month (E): 950

Churn Rate Calculation:

Churn Rate = (50 / 1,000) x 100% = 5%

A churn rate of 5% means that, on average, the company loses 5% of its customer base each month. To maintain or grow your revenue, you need to acquire new customers to offset those losses. 

This means you'll likely need to allocate a portion of your advertising budget towards customer acquisition campaigns. This churn rate affects things like your LTV. Customers who churn have a shorter lifespan, reducing their overall value. This means you can afford to spend less on acquiring each customer, as their potential long-term revenue contribution is lower compared to customers with lower churn rates.

You can create custom audiences consisting of customers who have churned and target them with personalized ads or promotions on Google Ads. This allows you to re-engage lost customers and potentially win them back, thereby reducing the impact of churn on your business.

Example Google Ads Campaign

In this example, let’s assume you’re comfortable with spending $50/day on a 30-day campaign. That’s the minimum spend we recommend. The table below uses that daily spend and assumed number of impressions to calculate your revenue, CAC, and LTV. It will also tell you how many leads and customers your campaign might acquire.

You can use this calculator to adjust your daily spend based on the outputs.

We’ve made some assumptions here based on our Keyword data and other factors mentioned above:

• 7,000 impressions (hedged from 10,000)
• 5% conversion rate (this is a B2B business)
• 4% CTR

Note: your campaign will be in a learning phase for around seven days, so it’s best to let Google learn and refrain from making any changes.

Free Budget Template

If you spend $50/day on a Google Search campaign, you can assume that your campaign has the potential to generate 280 leads that will convert to 14 new customers. 

So, if you spend $1,500 on Google Ads over 30 days, assuming your AOV is $2,000, the result could be $28k in revenue. Not bad, right? There are obviously many factors that could affect this number, but this should give you a good idea of your advertising outcome. Sometimes, just $50/day can lead to amazing results. 

The LTV/CAC, or ROI, in this scenario is 14.36. This means the customer’s value is 14 times the cost of acquisition. This is a pretty high ROI. As mentioned above, we like to see at least 2. That tells us our assumptions are likely to give us a healthy ROI. If we are below that, we need to make some changes.

We hope this guide helped you determine what to spend on Google Ads. It can be a daunting decision. 

Not sure if you’re ready to manage this on your own? We’d love to help! At Fable Heart Media, we specialize in helping businesses harness the power of Google Ads to achieve their marketing goals. Fill out the form below and we will be in touch!