This is one of the most common questions we get asked and also one of the hardest to answer. There are a lot of factors in determining how much you should be spending on your Google AdWords and I'm going to discuss a few of them here.
Setting Your Daily Budget
If you have absolutely no idea where to begin the Google traffic estimator is a good place to start. Once you have your keywords you can plug them in to the traffic estimator and Google will give you an estimate for position, volume of clicks and total daily ad spend for a bid that you provide (you can play around with a few different bids here to get an idea of how much difference the bids will make).
Disclaimer: The traffic estimator is definitely not 100% accurate and should only be used as a rough outline for where to set your daily budget limit for your campaigns.
How Much Should I Bid?
It is extremely easy to lose money on AdWords if your bidding isn't well thought through. The most important thing to figure out is how much you are making from your different keywords and use this to guide your bids. To find out the maximum bid that is still profitable you will need to know the conversion rate of the keywords and the profit per sale.
If you're running a brand new campaign then you will need to use an estimate for your conversion rate and come back to the calculation when you have some data.
Taking the example of a shop owner selling goods online, there are some very important metrics to know before we can answer the question on how much to bid:
Conversion rate = sales / clicks (How many of your clicks turn into actual sales?)
Profit per sale = average order size x profit margin
Armed with this information we can now figure out the maximum price we can pay per click and not be losing money:
Max bid = conversion rate x profit per sale
Time for an example....
Looking at the conversion tracking data from my campaigns I can see that 4% of my clicks are becoming sales. My average order value is $150 and there's a 25% margin on my products.
Max CPC = 4% (conversion rate) x $150 (average order value) x 25% (margin)
Max CPC = $1.50
The most I can spend per click and not be losing money is $1.50.
In the example above, if I pay $1.50 per click I will break even on my AdWords campaign. This is not exactly ideal and the only one you'll be making happy would be Google!
The less you pay per click the higher your profit per click will be but profit per click is not what we want to maximise - we want to maximise the total profit of the account.
If I pay $0.05 per click I will receive a huge profit per click but the chances are I'm not going to be getting many clicks. To find the highest total profit we need to be balancing the profit per click with the volume of clicks the campaigns are generating.
Given the number of factors involved in this balance (quality score, bid price, cpc, conversion rate, position, Google's algorithm) it is not possible to give a perfect answer.
This problem becomes more complicated when we start to factor in the fact that my conversion rate is different across different keywords. What if my shop sells a wide variety of different products all with different profit margins?
Here it starts to get complex and unfortunately there is no simple way to manage accounts like this. Time is needed to set this up but that doesn't mean it should be ignored! Setting AdWords campaigns with the ability to measure the total profit at keyword/product level means that you will be increasing your ROI and you'll be able to blow your competition out of the water!
Tweak Your Bids
The answer is tweaking your bids and ensure you bid below $1.50. I would suggest starting with a bid at 50% of your maximum and measure the results. So if we were to bid $0.75 we know we are not going to be breaking even, but we are likely to receive a steady amount of traffic to the website.
From here we can begin to look at conversions for individual keywords and even start to modify bids based on the conversion rate of individual keywords. The best way to get started it to setup AdWords conversion tracking or import your Google Analytics goals.