Phil hosted a great Google AdWords webinar the other day, and we had a very lively Q&A session at the end.
One of the most common questions we receive about AdWords is: How much should I be spending in Google AdWords?
That’s a great question.
There are really 2 answers to this question.
First, Start with a Test Budget.
When you’re just starting out, you’ll want to contain your costs, because you don’t know what’s going to work.
You’re in testing mode. It’s possible that your initial test campaign will be profitable, but you may only break-even, or you may lose a little money. We’ve created a lot of campaigns that were profitable right out of the gate, but you shouldn’t expect this to happen. Instead, your mindset should be that you’re investing in market research.
With your initial testing, you’ll gain insights into what ad messages are resonating with your target market, and you’ll also learn what keywords are converting into qualified leads and customers. Plus, you’ll be able to test which messages on your landing pages are working best for converting clicks into leads and customers.
What should your test budget be? You can roughly calculate your test budget by multiplying the number of keywords you want to test by the cost per click and by a minimum of 100 clicks. As a general rule, you’ll want to get at least 100-200 clicks on a keyword to determine whether it converts for you.
So, for example, if you’re going to test 10 keywords with a cost per click of $1, we’d recommend you plan on a test budget of $1,000 to $2,000. Most likely, you’ll have a mix of winning and losing keywords, ads and landing pages from this initial test. As you see the results come in, you’ll “prune” your campaign — keeping the winners, dropping the losers — to bring your campaign to profitability.
…Then, Ditch the Budget.
Once your campaign is profitable, you should ditch the budget.
The most successful advertisers don’t cap their budgets. They know that effective advertising is one of the best investments you can possibly make in your business.
Think about it: If you’re investing $1 into AdWords and getting $1.25 or $2 or $3 or $5 in return, why would you want to put a cap on that?
Assuming you want to grow your business, you should want to make that investment as many times as possible.
Focus on ROI, Not Cost
If you want to be the dominant advertiser in your market, you can’t just focus on managing costs — you must focus your energy on maximizing your return on investment (ROI) from advertising.
We have a private client who spends more than $100,000 per month with Google AdWords. And he’s happy to do so because he earns a healthy profit on that advertising. In fact, every month, he’s asking us for ideas for how he can invest MORE money into advertising!
So how do you get to the point where you’re scaling up your advertising and capturing more market share?
Focus on EPC, Not CPC
You can’t just focus on cost per click (CPC). Many advertisers just focus on getting their CPC down. They try to write better ads to improve their AdWords quality scores so they can get cheaper clicks. But that’s only half the equation.
Of course, you should always be looking for ways to make your advertising more efficient. But minimizing CPC is NOT where the real leverage is located.
Instead, the real leverage in Google AdWords is in increasing your earnings per click (EPC).
If you have the highest EPC in your market, you can outbid your competitors and gain more clicks, more leads, and more customers. That’s how you really win the AdWords game.
How To Calculate Your EPC
Just multiply your conversion rate (the percentage of people who click you become paying customers) by your customer value (the amount of money you earn, minus fulfillment costs, from 1 new customer).
Here’s the equation: Customer Value X Conversion Rate
For example, if an average customer generates $100 and you have a conversion rate of 1%, then your EPC is $1.00.
That means you could advertise profitably on keywords with a CPC under $1.00.
But what would happen if you increase your EPC to $1.50 or $2.00? Well, you’d be able to profitably increase your bids and gain more market share. In our experience, when you can increase bids by 50% or 100%, you typically will gain much more than 50% or 100% more traffic (typically it’s a multiplier effective where you can get a TON more traffic).
So if you really want to dominate your competitors in Google AdWords, you need to focus on maximizing your EPC. And in our next article, on Monday, we’ll go over some tips for how to do that.
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