One of the most difficult questions when starting out with Google AdWords is, what your monthly or daily budget be. You might have heard various different suggestions, most of the references being vague such as a small, medium or big budgets. This is so, because the daily budget depends very much on the specific factors that affect your campaign and there is really no correct answer.
We will try to consider the various factors that you can base on decision on especially when you are starting out.
Usually, you have no prior experience with the AdWords platform, so there is a learning curve. You tend to make mistakes more often when starting out, so you need to prepare for such mistakes and keep the financial damage to a minimum. Also, you probably have no idea which ads, demographic, geo-location or keywords will convert and will give you a good return. You will need to find that out as you go.
As a rule of thumb, I recommend small businesses to start out with a very small daily budget. This is usually some amount that they can spare without feeling the pinch. This could be as low as about 3 or 5 dollars a day. Even if you have lots of money, I recommend starting with a small-ish budget, maybe something like 20-25 dollars a day. This should be an amount that you are comfortable with even if it does not generate a single sale.
Revenue or Profit
Ideally, the marketing budget should be set based on the Net Profit and not the revenue or total sales. But if you are a small business that does not generate a whole lot of profit then it does not make a whole lot of sense to base it off the profit. The intention of the AdWords campaign is to increase the sales and generate more revenue and thus (hopefully…) a profit.
In this case, you are basing the overall Adwords budget off the revenue. I usually suggest a marketing budget which amounts to about 5% of the revenue for Adwords. For a small brick-and- mortar business which brings in about 100,000 USD in sales or revenue, it amounts to 5000 USD a year, which works out to about 13-15 dollars a day. Remember that this is just the starting budget, and as the sales increase you can reset or increase this budget …..maybe every month, or even every week (but that depends).
Many research studies suggest a 10% marketing budget for start-ups and up-and-coming business. Investing only half of it in online marketing (aka Google AdWords) leaves the rest for other marketing channels such as local, print and media.
Does your business sell or generate revenue online or is it a brick-and-mortar business? In the case of an e-commerce website, you have much more data to work with to find out as to what is converting and what is not. This data is also much more quicker to gather than in the case of a brand building campaign.
This means that in the case of an E-commerce website, you can change your daily budget much more often. This also means that you can probably allocate a slightly higher daily budget, as you can scale back much more quickly for non-converting keywords.
Profit Margin and # of Sales
How much profit do you make for every sale or does it vary? That will typically depend on several things such as: do you sell a variety of products or do you sell just one type of product, is it a product or a service, does the margin vary between products…etc etc. The small-ish budget allows you to make some sales over the course of a time period such as a week or month, so that you can now compute as to how much of a profit margin you have…Are you trying to sell dollar pins or is it million dollar houses? Beware, that depending on what you are selling you could go days or months without making a sale.
The art of setting the budget is to never exceed the profit that you are making from the sales. If you are spending more on marketing than the profit then it is time to scale back. It will take some time and tinkering to get the right budget, but it is doable…Also, depending on the number of sales that is made, you might be better off setting a monthly budget rather than a daily budget. If there is a large number of sales or conversions, then you can set a daily budget that you can change often.
Depending on the budget, the revenue channel, and the number of sales made… you should frequently change or optimize your budget. This could be a month in most cases, but it could be as short as a week if you do make enough or a lot of sales. Make sure that you do not change the budget with out considering a good sample size over the course of time.