FAQ: How much should you spend on paid search?

PPC BudgetWelcome to the first post in my new blog category, “frequently asked questions.” Aren’t you excited? I know I am! My very first question comes at me at least twice a week from various sources, so it makes sense to address it once and for all.

How much should you spend on paid search?

It pains me to write this on my blog almost as much as it pains me to say it aloud whenever anyone asks me this question – but the answer is…it depends.

First of all, your paid search budget can really be anything you want it to be. What I mean by that is that there is no required minimum spend for running ads on Google or Yahoo/Bing. You need $5.00 to get started on AdWords and you can then allocate whatever you want towards your ads. You can create your account and build out all your campaigns and keywords without adding a funding source (e.g., your credit card) so your ads will remain offline until you decide how you want to pay.

BUT….(and you knew this was coming, I’m sure), there are a few things to consider when setting a paid search budget, particularly if you’re trying paid search marketing out for the first time. Here are some things to consider before getting started.

  1. It’s helpful to know how to structure budgets in your account. Paid search budgets are set up at the campaign level as daily budgets. You can have multiple campaigns in your account, so if you have a monthly budget of $1000 and two campaigns, then you would set the budget for about $16/day each. Now, this is really important because if the CPC is very high in your industry (e.g., $10/click) then a daily budget of $16 isn’t going to get you very far. Which is why it’s helpful to understand…
  2. How competitive your keywords are. You can figure this out by performing some searches on Google and also using Google’s Keyword Tool which provides volume of competition and average CPC amounts. How does this help you determine budget? Well, if you are in a highly competitive industry like personal injury law, you will likely find that CPCs are very high (between $8.00 and $30.00 according to Google’s keyword tool). Now, compare this with something less competitive like “electric radiant heat” which averages from $2.00 – $4.00 and you will start to see why the budget requirements should be very different for the two keyword categories.
  3. Once you’ve got a sense for your CPC, then you plug it into a formula to help you determine a sufficient monthly budget by estimating the monthly clicks you can expect based on your budget. The formula looks like this Budget/CPC = Total Clicks. So, if your CPC is $3.00 and your monthly budget is $500, you can expect to get 166 clicks/month. This may be fine for you – 166 clicks/month with a 2% conversion rate = 3.3 leads/month. If you are selling electric radiant heat installation, this may be more than worthwhile. However, if your average CPC is $10 or higher, than a $500 monthly budget is likely too low to be worth your while. That translates to 50 clicks/month which may further translate into very few conversions.
  4. Keep in mind that if the CPC is under $2.00 then a preliminary test budget of $500  – $1000 is enough for advertisers to gauge whether or not paid search is an effective lead generator. This may not be the case if you are an e-commerce site unless your site conversion rate is very high (above 2%) and your average sales value is also relatively high (above $100). Low ticket items ($50 or less) generally do not perform well on paid search in terms of ROI if the CPC is above $2.00.

I tell my clients to set aside about $1000/month to as much as $5000/month (depending on the industry) as a place holder budget for paid search. For most businesses, this is enough of a budget to determine if paid search will work for them. I also think it’s important to get actual data from a live campaign because Google’s estimation tools are just guidelines. A live campaign can go in a very different direction from industry averages, particularly if you are careful to establish good quality score right from the start.

Also, a word of advice for small, local businesses. If the monthly budget numbers scare you, don’t worry! You’re not out of the game yet. Local businesses that cater to niche market and community members (e.g., small clothing boutiques, private music instructors, orthodontists, restaurants, catering services, car dealerships, etc. etc.) can target their campaigns down to the zip code level and, for this reason, do not have to allocate as much money to the testing process.

And there you have it – my answer to a question that really can’t be answered. You’re welcome!