Google Ads is the most in-demand advertising platform in the world. However, making sure you see a great return on investment (ROI) when using Google Ads can prove challenging.
This is especially true if you're not quite sure what you're doing.
How much does a Google Ad cost?
Know Your Numbers
Finding out how much Google Ads is going to cost for you is a bit of a journey, but in order to get to the holy grail, we need to start with YOUR numbers.
If you have a business going already, you are in a great position to math-it-up! For those yet to have customers coming through the door, maybe go out and hit the streets to get customers before you start spending money on ads. It’s called Product/Market Fit. Sheesh!
Lifetime Customer Value
The biggest determinant on the cost of Google Ads is how much you and your competitors are willing to pay. How much you are willing to pay is based on how much money you make. The easiest way to look at Google Ads cost is to first look at how much a customer is worth to you.
Let’s use a Personal Loan customer of our wonderfully fictitious client, NextBank, as an example:
- Average Loan = $10,000
- Average Length = 5 years
- Repayments = Monthly
- Interest Rates = 12%
- Cost of Capital = 3%
At the end of the 5 years, that customer is making them around $2,455. To do this properly, we’ll also need to consider cost of servicing etc. but what we are after is, on average, what is the financial benefit to the business per customer.
Working back from acquisition, we need to work through how many people are coming through the funnel.
For NextBank’s Personal Loans, they get 2% of people landing on their web page convert in to customers, regardless of how that person got there (paid, organic etc.).
So now we know the absolute maximum NextBank are willing to spend to get someone on their website:
- LCV x Conversion Rate
- $2,455 x 2% = $49.10
Targets & Metrics That Matter
Every business has their own targets and objectives to work through. Some are at the early stages where the number one goal is number of new customers, regardless of the cost to acquire (these guys are funded by VC’s); some have a more profit driven focus (you know… a business), but even then, the number they use can be different.
Cost Per Acquisition (CPA): How much was spent to acquire a customer.
- $5000 spent x 5 conversions = $1000 CPA
Return On Ad Spend (ROAS): A multiple of what has been spent on advertising.
- (5 conversions x $2,455 LCV = $12,275) / $5000 spent = 2.455 (and yes, I opened excel to work that out)
Return on Investment (ROI): For every dollar put in, how much will you get back
- ((5 conversions x $2,455 LCV = $12,275) - $5000) / $5000 = $1.45
Customer Acquisition Cost (CAC): A better metric for those with a need to go through a sales function as we include all of the costs of the sale. You would compare this against LCV to ensure you are growing profitably
- ($5000 spent + $1000 sales folk) / 5 conversion (customers) = $1200
So which is best for you?
That depends on the type of business you are in and where you are on your growth curve. For NextBank, internally they would be looking at LCV-CAC. We would be looking at a target CPA, as we can’t control the sales cost, and there is always a variability when it comes to fulfilment costs.
For eComm, most agencies would be targeting on ROAS, particularly through Social Advertising. But the business needs to know that LCV and/or ROI to ensure they don’t go out of business.
Google Ads Pricing and the Auction System
Now we have some of the metrics and revenue drivers sorted, let’s just spend a couple of minutes covering how Google works. Trust me…. We will get to the cost of Google Ads, but I want to give you a better answer than “Depends” and this stuff is important.
Google Ads relies on an auction system to determine which ads will appear for a particular search and in what order. This system emphasises three factors:
- Your bid
- The quality of your ads
- The expected impact from your ad formats and ad extensions
Depending on how you set up the campaign, you may be asked to enter how much you are willing to spend on a specific keyword (manual bidding). Let’s say the max NextBank wants to spend is $4.00 for a click on the keyword “Personal Loans”.
Now, every time someone searches for “Personal Loans” you are going to be in a live auction with others also wanting to get their ads shown. The more competitors wanting to get in on the action, and the more they are willing to pay, will have an impact on how much you will pay.
Now it’s important to note, that just because you said the max CPC was $4, doesn’t mean you pay $4. If your competitors max bids aer $3, then you might win with $3.01.
Another factor in the Google Ads auction is based on the relevancy and usefulness of your ad and website. According to Google:
“Real-time, auction-specific quality calculations of expected click-through rate, ad relevance and landing page experience, among other factors, are used to calculate Ad Rank at auction time.”
So, if you have an awesome ad with excellent CTR, and a page that is high converting or low bounce rates (a proxy for landing page experience), then you could actually get to the top of the search results AND pay less than the second position.
To help raise the relevance and Ad Rank, check out our guide on how using effectively Keywords can drastically improve the performance of your campaigns.
See. I told you it would be important to working out the costs 😉.
Using Keyword Planner To Find Cost Per Click
If you are about to launch a campaign for the first time, you don’t have a lot of information to start with. Which is where Google’s awesome Keyword Planner tool comes in handy. You can find it in the Google Ads platform under Tools:
For the full break down on how to use this tool, go through the Essential Handbook to Google Ads and it will show you how you can get the expected Cost Per Click for any keyword.
We now know that “Credit Card” has a low range Top of Page of $10.53 and high of $40.13. This means in order to bid for the top placement, we would expect to pay anywhere between $10-$40 per click. That means every time someone clicks on that ad…. Cha ching…. Google makes $10-$40. What a business!
Now, we could bid lower than the $10 and be in a lower position; or we could have a really good Ad Rank rating and still squeak in to the top position. Until we are in the live auction, we are just using Google’s best guess (which is pretty damn good to be honest).
We will get much, much better information once the auction is live, but let’s conservatively assume we will get $20.00 per click. Assuming that same 2% conversion rate, we need to get 50 clicks to get 1 conversion. As we have different information than before, we would look at working out CPA by:
- $20 CPC / 2% conversion rate = $1000 Cost Per Acquisition
So every $1000 we spent with an average of $20 CPC and 2% conversion rate, we will get 1 customer.
Working Out How Much Google Ads Will Cost
By now, you might be able to see how we are going to bring this all together. Now that we now know the CPC, CPA, CAC and so on, working how much to invest in Google Ads is now based on what you want to get out of it. I.e. what your targets are.
And I’ve highlighted the word invest above, as that is how you should be looking at it. Google Ads shouldn’t be a cost, it should be an investment. And like all good investments, you need to have an idea about what you want to get out of it.
Let’s say your business, like most businesses, has a Revenue target and from Google Ads we need to make $50k per month in additional revenue. We already know that the LCV of a customers is $2,455.
- $50,000 revenue target / $2,455 LCV = 20 new customers
- 20 new customers x $1,000 CPA = $20,000 Google Ads cost OR
- 20 new customers x $1,200 CAC = $24,000 Total Sales & Marketing (incl. Google Ads)
By using CPA, we are able to determine more easily the expected investment amount into the Google Ads platform. CAC has a few other things going on, and would suggest the senior leadership should keep an eye on this.
Another common target is customer acquisition. The math's is the same as above, except you don’t need to work out how many new customers to hit your revenue target.
Working out how much Google Ads will cost for you isn’t that hard, and we should at all times move away from these lazy “it depends” statements. Whether we have campaigns live, or yet to advertise, by using the information available to us, we can work out how much we can expect to invest in Google Ads.
Once the campaigns have been live for a few months, with conversions being tracked effectively, we can then pin point exactly how much Google Ads will cost.
If you are looking for more ways to improve your Google Ads performance, you should check out our article on Negative Keywords. It will Blow. Your. Mind. 🤯