This is a great question and one that we help answer all the time. Deciding on a monthly budget can be difficult and, like seemingly everything related to Adwords, there is no single, correct answer that can be applied to all advertisers. Because that is not much of an answer, as a follow-up we are often asked: “Okay, then what is my industry’s standard?” Again, everyone’s business is unique and there is no standard answer, even for an industry.
While there is no right answer, there are two distinct groups who will determine their budgets in very different ways. The first group is advertisers that are new to Adwords and are running a campaign for the first time. The second is advertisers who have a mature Adwords campaign that has been running long enough to fully understand the campaign’s performance and ROI.
First Time Adwords Advertisers
Because first time advertisers have no historical data, this group will be determining an appropriate test budget. It’s incredibly important to go into this test with the mindset that this ad spend is an investment, not just a cost. Regardless of the outcome,–profitable, break-even, or unprofitable–the data and knowledge you will learn from your Adwords investment will likely be the most valuable take-away from your test budget.
Getting the size of your test budget right is really important for a few reasons. Choosing too small of a test budget may result in the wrong decision being made due to insignificant amounts of data, while too big of a budget may result in a massive hit to your businesses cash flow if things don’t work out. Here are some questions that must be answered in order to determine the right test budget:
What is your Cost-Per-Action Target?
Your goal should always be to drive profit which typically translates to either leads or sales on your website. Testing the right way isn’t inexpensive and we typically would suggest a budget that is 20x-30x your cost-per-action target for a minimum of 3 months. So, if your goal is to drive leads at $100-per-lead, your budget would be a no smaller than $2,000-$3,000 per month, for a minimum of 3 months and your total test budget would be between $6,000-$9,000.
The reason has everything to do with data collection. Remember, while the goal is obviously to drive profit there is a good chance this won’t happen from day one. The only way to improve the campaigns is through the collection of data and subsequent optimization. The reason we recommend 20x your cost-per-action target as a minimum is that if your campaigns collect fewer than 20 leads per month, it becomes extremely difficult to optimize due to the lack of data.
What is your business’ budget?
Of course, the biggest determinant of your Adwords budget is your business’ cash flow and available finances. Despite our ’20x recommendation,’ often times advertisers just don’t have the cash flow to test on that scale. That’s okay. While it will be more difficult and will take longer to learn, it’s more than possible to test with a smaller budget. Likewise, if you have a bigger budget for testing, and want to learn and optimize faster, setting a budget that is 100x your cost-per-action target or larger is great and only speeds up the learning curve.
Once your campaigns have passed through the test budget phase and have been running long enough to have a good understanding of ROI, we suggest a major change in the way you think about budgets.
Mature Adwords Campaigns
Instead of focusing on cost and setting a hard, monthly budget, mature campaigns should focus on the performance and let your data drive your budget. We call this an unlimited, performance-based-budget. Once your Adwords campaigns have been running long enough to fully understand ROI, setting an artificial budget will do nothing more than limit your profit.
Going back to the $100-per-lead example, let’s say you’ve determined that for every $100 lead the Adwords campaign produces you profit $50. That means that for the third month of your $3,000 test budget your campaigns drove 30 leads and $1,500 in profit. Terrific!
But, in the campaigns Google says that your campaign’s status is “Limited by Budget.”
By clicking on the “Limited by Budget” graph, Google estimates that based on current keyword bids, there is 50% more traffic available and that we missed out due to our budget limit. Ensuring that the campaigns continue to drive leads at $100/lead, that means that with an unlimited, performance based budget, the campaigns could have driven 45 leads and $2,250 in profit. That’s a 50% increase in profit and business just by making one change in Adwords and being smart enough to let your performance drive your budget, not the other way around.
When setting your Adwords budget remember, it’s not a contest. For starters, your budget should be set so that it’s high enough to learn and low enough that you’re comfortable with it. Once your campaigns are running efficiently and exceeding your goals, let your data make your budget decisions, not artificial caps for silly external factors. Remember, in Adwords budgeting there is no “keeping up with the Joneses” because it’s not the size of your budget that counts. It’s how much profit your budget is generating.