Google Ads are an excellent way to place your business in front of new customers – especially if you don’t rank high (organically) in Google search results. At Evolving Digital, we think of Google Ads as a shortcut. For example, it may take months or, in some cases, years to organically get your website on the first page of Google; therefore, if you don’t have time or if you need results immediately, Google Ads are a great way to take a shortcut to the top of Google’s search results.
While most small businesses and startups we came across are willing to try Google Ads to boost their lead generation, they are hesitant because they are a) unsure how much to spend and b) how to calculate their return on investment (ROI).
Let’s look at a few factors that will largely determine your Google Ads spending (budget) and how to determine if you are getting a good deal or not.
Cost Per Click
It all starts with the cost-per-click. In other words, how much are you paying for every ad click? Luckily, Google Ads has a great tool (Keyword Planner) that you can use to estimate your cost-per-click.
If you are new to Google Ads or pay-per-click (PPC) ads, don’t worry, we will cover some basics. The two most important concepts you need to understand are a) you are paying Google every time someone clicks on your ad, and b) the ad price is driven by demand.
While the first point (clicks) is self-explanatory, the second point (demand) is not as straightforward, so let’s cover the demand side. In essence, the higher the demand for a specific keyword (e.g., “Accounting Services in Orange County”), the higher the cost-per-click. For example, if only a few accounting firms are advertising their services using that specific keyword in Orange County, California, then the cost-per-click will be relatively low. However, if 20 firms were competing to advertise using “Accounting Services in Orange County,” the cost-per-click would be substantially higher.
Let’s look at a real example to demonstrate how the cost-per-click varies by search volume, competition, industry, and geo-location.
By reviewing the example above, we can see that not all keywords are created equal. For example, the search volume, the competition level, and the cost-per-click estimate differ from one keyword to another.
For example, we can see that “Accounting services for small businesses” will likely cost us between $17 and $40 per click. But, on the other hand, “Accounting Services” will cost us between $5 to $25 per click.
Unsurprisingly, the “Accounting services for small businesses” keyword is more expensive because a) an accountant will typically generate more revenue working with a small business vs. an individual, and b) the keyword is more specific (targeting small businesses).
Let’s assume the accounting firm in this example primarily serves small businesses; therefore, they would like to use the “Accounting services for small businesses” keyword.
The next logical question is, is this cost-per-click expensive or not? More specifically, we have to pay Google between $17 and $40 every time someone clicks on our ad – redirecting them to our website (or landing page).
The main concern for a business owner or a founder is that potential leads will click on the ad but not contact the business. For example, they won’t call or fill out the contact form. This is a legitimate concern, but we will not go into website and landing page optimization in this blog post.
Another critical factor we have to discuss is that your cost-per-click will significantly vary from industry to industry. For example, “carpet cleaning” may cost $5 to $13 per click, while the “injury lawyer” keyword may set you back $45 to $500 per click.
Obviously, injury attorneys make a lot more per transaction (or client) than carpet cleaners; hence they are willing to pay a lot more to promote their services on Google.
This is precisely why a digital marketing expert will typically ask questions about your industry, business, and market niche before answering any Google Ads questions.
Calculating Your ROI
After you run a few example keywords in Google’s Keyword Planner, the next step is to research the conversion rate. Like the cost-per-click, the conversion rate will vary significantly from one industry to another. For example, we have seen Google Ad conversion rates from 3% to 15%.
Note: For many businesses, conversion equals completing an online inquiry; therefore, in this example, the conversation rate is the percentage of Ad visitors that complete the online inquiry/form (i.e., contact the business).
Using our accounting firm example above, let’s see how you can easily calculate your return on investment.
- $3,000 = Google Ad Budget (How much we are willing to spend on Google Ads)
- $30 = Cost-per-click (average)
- 6% = Conversion rate (based on our industry research)
Note: When it comes to conversion rate, it’s best to use your actual conversion rate. However, if you don’t know your conversion rate percentage, then using an industry average is acceptable for planning/estimating purposes.
In the example above, we can estimate that $3,000 will generate 100 clicks (website visits) and 6 inquiries (6% conversion rate); therefore, we will likely end up paying $500 per inquiry/lead. And if we close 50% of our inquiries, our cost-per-client is $1,000.
- $500 = Cost-per-lead
- $1,000 = Cost-per-client
In the example above, we expect to acquire 3 new clients from our Google Ads campaign. So now the most important question is, is paying $1,000 to acquire a new client a good return on your investment or not?
The answer is that it depends. If we have an excellent client retention rate (our clients stay with us for years) and we regularly bill our clients $1,000 per annum, then paying $1,000 for a new client is not expensive. However, as you can imagine, if our retention rate was poor and the average client only made us $300, then paying $1,000 for the client is expensive/unsustainable.
As you can see, the crucial ROI calculation you need to make is the cost-per-client/customer and not cost-per-click. This is why we hesitate to answer client questions like “Is our cost-per-click expensive or not”? There are just too many other (more important factors) you need to consider. For example, conversion rate, cost-per-lead, client retention rate, customer lifetime value, etc.
Google Ads will undeniably bring you new business (if ads are implemented correctly); thus, the question is not whether Google Ads are effective but, instead do they make financial sense for your specific business.
And as we discussed in this blog post, the best way to answer “How much you should spend on Google Ads” and “Do Google Ads make financial sense for my business?” is to calculate your cost-per-customer/client. Only focusing on the cost-per-click is a mistake.
Lastly, do not underestimate the importance of the conversion rate. A poor conversion rate can make your ad extremely expensive because it will result in a very high cost-per-client/customer. On the other hand, a good website, a great landing page, and a high conversion will make your Google Ads much more affordable and effective.