How Much Should We Be Spending on Google AdWords?

Determining the right budget for your digital advertising campaign can be a bit of a challenge. There are many factors that come into play here, some of which are completely beyond your control:

• Your industry
• Your competition
• Your goals
• Your company’s allocated marketing budget
• Your company’s philosophy regarding digital advertising

With all these things in the mix, launching a successful AdWords campaign can often seem like an impossibility.

Finding the Ideal Budget

Unfortunately, there is no magic number when it comes to how much you should spend per month on advertising. Things vary too widely across different industries to ever come up with a universal monthly spend that will result in maximum ROI. Sure, it would be great if we could say, "If you spend exactly $18,547 per month on paid search advertising, then you will achieve all of your business goals." Sorry, but it can’t be that simple.

Instead, it’s important to come up with the right advertising budget for your particular situation. This requires knowing your goals and doing a fair amount of research. It also requires some risk and a little bit of trust. Going into a new campaign, there’s no way to know for sure how profitable it will be. This leaves many businesses afraid to open the wallets enough to get a sniff at their potential.

Here’s a common situation:

Company A wants to start an AdWords campaign. They have no idea how much they should spend, but someone who controls the finances sets aside a certain amount of money based on no research whatsoever. They come up with a $2,000 monthly budget. The company then finds someone to manage the AdWords account and asks for a strategy. After doing extensive keyword research, the AdWords account manager determines it will take about $10,000 a month in ad spend to be competitive in the industry—and see the biggest positive return. Company A says to proceed with the $2,000 a month plan. This leaves the AdWords account manager in a bind. The dreaded "limited by budget" label pops up in the account, and the budget runs out in the first week of the month.

These companies often go into AdWords with a "prove-it-works" attitude. If you can prove it works, they might spend more money. But when you severely underspend in digital advertising, it’s difficult to accomplish much. It’s hard to optimize the campaign because you can never run long enough to see when and where you should be spending. You can’t maximize your ROI because there simply isn’t enough data to do so. Even the greatest AdWords "ninja" won’t be able to do much with this account. You might be able to squeak out a positive ROI, but you certainly won’t be making the most out of the opportunity. You could be making a lot more money simply be spending more.

Spend More, Make More?

In an ideal world, we would all have unlimited budgets. If you ask Google, the best budget strategy is to spend as much money as possible. It may seem counterintuitive to some business owners, but it makes sense. If you invest more money, you should make more—assuming, of course, that your campaign is being managed regularly by someone who knows what he/she is doing.

Depending on your industry, your monthly spend may have to be quite a bit in order to reach your potential. While this can scare off many businesses from running digital advertising campaigns at all, it’s important to understand that it will pay off.

In the old days of advertising, companies had no problem spending thousands of dollars on print ads that had no discernible return. How many business owners must have had a conversation like this?

"Hey, how’d that magazine ad work for you?"
"Fantastic. Business has been great."
"Did you get more customers?"
"Beats me."
"Did any of your customers say they saw the ad?"
"Yeah, one guy who’s been doing business with us for years said it looked really nice."
"So how do you know it paid off?"
"Because we’re still in business."

The magic of digital advertising is how easy it is to prove the value. Still, many business owners are terrified to raise their budgets. Here’s another common situation:

Business C, an ecommerce company, has a $20,000 per month AdWords budget. Their goal is a 400% return on ad spend (ROAS). For the past three months, they’ve exceeded the 400% ROAS, but they’ve also run out of budget well before the end of the month. The company running their AdWords account suggests raising their monthly budget so they can get all the way through the month. Business C responds that they have a hard cap on $20,000 per month.

Business C is doing it wrong. They are losing out on a sizable chunk of revenue here. Investing more money in their digital advertising will clearly result in more measurable profit. But rather than choose to be more profitable, they decide to stick to some hard-and-fast monthly budget that isn’t based on what’s best for the company.

So how much should you be spending on AdWords? Ideally, you should spend as much as it takes to maximize your ROI. Of course, in order to do this, you need to know the value of each sale and the value of each customer.

This isn’t to say that you can keep spending more and spending more on some infinite scale. Eventually, you’ll reach a point where you’ve maxed out all your opportunities. You’ll know you’ve hit this point when spending more money starts to result in a decrease in ROAS. But as long as it’s still profitable, there really is no reason to limit your budget.    

Does AdWords Really Work?  

Many businesses claim AdWords and other paid search advertising opportunities don’t work at all. These are typically businesses that attempted to manage their own accounts (or got swindled by some hack or fly-by-night "agency"). They may begin their AdWords campaign with lofty expectations and end up feeling like they just threw money away. In reality, they just have no concept of what they should be doing. They blame AdWords for their own deficiencies.

Digital advertising is not simply a build-it-and-they’ll-come strategy, nor is it a set-it-and-forget-it tool. You can only have a profitable return if you put time and effort into it. If you do it the right way, digital advertising can be an immensely profitable channel for your business. If you do it the wrong way, you’ll burn through money faster than you imagined possible.

Regardless of your budget, you can see a positive return on AdWords or any other digital advertising channel. To get the most out of digital advertising, you’ll need to have someone competent managing your account—and you’ll need to trust that person. More importantly, you’ll need to trust the data.

This post is part of Internet Marketing Mysteries, a weekly column addressing actual client questions related to SEO, analytics, website best practices, and any other topic connected to internet marketing. Have a question you’d like to see tackled in a future post? Let us know in the comments.