It’s an oft-asked question: "How much should I spend on AdWords?" Or, more often: "How do I tell my boss how much we should spend on Adwords?"
As an affordable SEO firm primarily focused on organic conversions, we don’t receive too many questions on Google AdWords. But since we have lately been helping companies set up their Adwords campaigns (and training Marketing teams to run campaigns on their own), we wanted to answer a question that’s on the mind of many people when they’re still trying to figure out the landscape, “How much should I spend on AdWords?”
Here's some down & dirty (and completely sound) advice!
In Marketing class, you probably learned how to determine Return On Investment (ROI):
ROI = (Revenue - Cost of goods sold) / Cost of goods sold
You probably apply ROI to a lot of avenues, especially when forecasting.
With Adwords & eCommerce, the formula can be slightly different, but the idea is the same. Here you want to calculate a Return on AdWords Spend, or RAWS:
Figuring that it costs approximately $1 per click, determine how much traffic you expect to drive to your website within a specific time period with AdWords ads (you can run campaigns for a single day, a week, a month – even hours!). So, if you want drive 3,000 customers to your site, you can estimate that you’ll spend roughly $3,000 to do so.
Next, think about what it’s worth to the company if at least 2% of the people who visit your site convert into buyers. For eCommerce websites, the formula for figuring out the Average Order Value (AOV) is Total Yearly Revenue/Number of Orders in a Year. (If you’re not an eCommerce site, you can still use a similar formula, or if your relationships last longer than one transaction, you can figure out the lifetime value of a customer and use that to calculate your AdWords spend).
RAWS = [[2% (Traffic x $1.00)] x AOV]] - Cost of Advertising
So, let’s say I work at ZZZ clothing company. The average order value I’ve calculated is $100. If I spend $3,000 on AdWords, expecting traffic to be around the 3,000 person mark, and at least 2% of those who visit convert, I can guesstimate that I will receive $6,000 in orders. Depending on the amount of revenue you make per order, you can consider whether or not it makes sense to spend $3,000 to make $6,000 in sales. If it doesn't make sense based on your revenue model, you may want to either up your spend, or figure out a different way to reach customers (like focusing on SEO, for example!). For many companies, the cost of Adwords can be completely worth the investment.
This is a great way to make the business case for Google Adwords. We hope it helps you as you navigate the digital marketing landscape.