Marketers and business owners struggle with the question: “How much should I be paying for paid search campaigns?” There are many ways to go about estimating budgets for your paid search advertising campaigns. In this article, we will go over a few top-down and bottom-up methods for figuring out how much you should be spending on Google Ads.

Let’s review a few top-down analyses you can do to figure out what the right paid search budget is for your business.First, let’s look at some recommendations from organizations like the Small Business Association:

Top-Down Tactics

The SBA recommends that most companies in a growth stage or early-stage startup mode should spend around 7-8% of their revenue on acquiring customers. If you’re a $1 million business, that would translate to $70,000 to $80,000 a year spent on marketing efforts.

You may not want to spend all of that on paid search. If you’re a business that interacts with a lot of customers through digital channels, we would recommend up to 70-80% of that total budget be spent on Google advertising or Facebook advertising. If more of your customers engage with your company digitality, or you have a higher profit margin than most businesses in your space, you may be able to afford much more than 7-8%, but I wouldn’t recommend spending more than 15% of your revenue on marketing expenses unless you have a very compelling reason to do so, such as a major growth mode, and you don’t mind taking a loss to acquire more market share.

Another top-down tactic you can use for figuring out your paid search budget is by relying on your customer acquisition goals. For example, if you want to acquire your customers for $200 per acquisition, and you want at least 10 customers a month, you should be budgeting at least $2,000 a month for your paid search efforts. You may not hit those goals, but that’s a great place to start when you’re thinking about your initial investment.

Bottom-Up Tactics

The second way you can determine your paid search budget is by using some bottom-up analyses to do something very similar. If you’ve already done keyword research, you can get a sense of what the average click costs of your keyword targets are. You may already know your website’s conversion rate in terms of how many people visit your website and become customers or leads. You can use these assumptions to back into a total budget that would meet your customer acquisition goals.

Let’s look at a few examples and break this down:

In this first example, we have a company that wants to drive at least 5 leads per month through their paid search efforts. We can take an assumption of the conversion rate of people who visit their website and become a lead of 2%. Using these two numbers, we understand that we need to buy 250 clicks, which is the 5 leads divided by the 2% conversion rate. We also know from our research that the average click cost for these keyword targets is around $5. Based on the goal of driving 250 clicks, we want to budget at least $1,250 every month for their paid search advertising.

In this second example, we have a client that wants to drive 10 customers every month in their business. They collect leads from the visitors who arrive at their website and close about 50% of those leads. Based on these two numbers, we know that we need to acquire at least 20 leads each month from the paid search campaigns. This company has already been doing advertising and knows that their website converts users to leads at a rate of 5%. Taking the 20 lead targets divided by 5% gives us the 400 clicks we need to drive each month to the website. After doing some research, we’ve determined that the average click cost of our queries is around $4. Using our click volume target and this click costs, we know that we should be investing around $1,600 every month in our campaigns.

These types of tactics can help you arrive at a range of budgets that your business should expect to spend on your advertising campaigns. When it comes to the real world, you’re going to get some quick feedback on your click costs, impression share, or web to lead conversion rate. Once you start testing, we recommend that you pay very close attention to not only your cost per conversion or cost per lead from those campaigns but also your impression share metric. We have an entire video dedicated to helping you figure out how to use impression share and how it can impact your budgeting decisions that you should check out here.

If you’re just starting, we recommend using some of these top-down and bottom-up tactics to get to a reasonable range of investment that you should be spending on paid search. If you have an active account, be sure to pay attention to metrics like impression share, conversion rate, and your click costs to give you some better data to make those same assumptions.

I hope this article has been helpful as you are starting to plan your investments in Google paid search. If you need help managing your paid search or SEO, contact our experts to see if we can help and remember to always be optimizing.