How to set up an ROI-focused Google Adwords budget
To get an ROI-focused budget working for your business follow these 5 steps:
Step 1: Find out your websites conversion rate:
To find your website conversion rate for each campaign look in your Google Analytics.
You’ll want to go to Acquisition > Adwords > Campaigns. Change the date range to the last 3-6 months. But make sure you have at least 200 clicks for each campaign.
Now export this data into excel and save it for later.
Step 2: Work out your business strike rate
This will depend on your sales funnel. There are 2 common cases here:
Case #1: Your website conversion is a sale, usually in e-commerce. You can skip this step.
Case #2: Your conversion is a website lead and you still haven’t closed a sale yet.
If you’re case #2 then you need to work out your strike rate. For example, if you get 50 leads but you only make 25 sales your strike rate is 50%.
In this case, you’ll need to work out your profitable cost per conversion with this in mind. If you don’t have internal data with these numbers start collecting them immediately.
Step 3: Working out a profitable conversion for your business
We will work out your cost per conversion target for Adwords. To do this you will need all the costs involved in making a sale.
Here’s the formula if you don’t have to worry about strike rate:
Total sales – (cost of goods sold + operating costs) = net income
For example: $12,000 – ($8,000 + $2,000) = $2,000
In this case, the business would make $2,000 per sale. How much would you be willing to spend on advertising on Google. Possible $500.
If you get website leads but still need to convert them offline the formula is a little different:
(Total sales – (cost of goods sold + operating costs) = net income) * strike rate
For example: ($12,000 – ($8,000 + $2,000) = $2,000) * 0.50 = $1,000
With a strike rate on leads of 50% this business will make $1,000 per sale. And may want to spend less on Adwords.
Step 4: Setting your conversion target
You should now have your target cost per conversion and website conversion rate.
We need to make sure our bids are set to result in profitable conversions. Here’s how to work it out:
Target cost per conversion * Conversion rate = Max CPC
$500 * 0.05 = $25
In this example, to make a profit, based on a 5% website conversion rate you should pay no more than $25 per click in AdWords.
Step 5: Work it out by campaign
Head back to your Excel file from earlier and repeat the above process for each campaign.
If your campaigns have products that range dramatically it may be worth doing it on an ad group level.
A good way to go about managing your cost per conversion target is to rename the campaign or ad group to reflect it.
Example: Men’s Shoes Campaign – $25 CPA target
This helps you whilst managing your bids.