A Dummy’s Guide to Google AdWords: 5 Factors that Influence How Much You Spend
So you want to do online advertising for your business website and sign up for a Google AdWords campaign.
But you haven’t got the slightest idea how online advertising works.
What’s your first and immediate concern? The money.
You’ll want to know where your money is going, and how your potential investment can help you profit.
In this blog, we’re going to talk about the different factors that come to play in determining an AdWords budget.
Or simply put, we’re going to answer a question that’s likely come across a lot of clients’ minds when signing up (a question even you might be asking right now): “why am I being charged this much for this service?”
The Market Factors
Factor #1: Competition
“The more competitors you have advertising on Google, the bigger the budget you’ll be needing to advertise yourself for your desired keywords.”
Your industry plays a major role in determining the size of your budget. The more competitors you have advertising on Google, the bigger the budget you’ll need to advertise yourself for your desired keywords.
Think of it like this: there’s only a couple of spots where your ads can be seen on Google search results.
If your competitors are willing to pay higher for their search advertising campaigns, you’ll need to adjust your budget to compete. Otherwise, your ads will be ranked lower on search results pages, where they are less likely to be seen and clicked on.
It’s a point that’s nicely summed by this short phrase from Adnan Khan, one of our very own AdWords specialists: “the more you spend, the more you’ll get.”
“The more you spend, the more you’ll get.”
Factor #2: Search Volume
“If you’re targeting keywords people use often to find what they need online, don’t expect a cheap price tag on your campaign.”
Price is driven by demand. It’s a simple concept: the higher the demand, the higher the price for the good or service.
It’s the same mechanism that drives AdWords campaigns.
If you’re targeting keywords people often use, don’t expect a cheap price tag on your campaign. That’s because you’re casting a really wide net, and a wide net means bigger spending.
On the other hand, if there aren’t a lot of people searching for your keywords, then you’ll likely need a smaller budget.
It’s all about weighing the cost-benefit ratio of your investment.
Do you shoulder the cost of advertising for high volume keywords? Or do you minimise your up-front spending and target keywords with lower search volume?
Strategise with your AdWords specialist to understand which approach will work better for your business.
Factor #3: Profit Margin
“In industries where the profit margin is very high, advertisers tend to bid higher until they hit the breakeven point.”
Investopedia presents a rather technical definition of a profit margins as a profitability ratios (sic) calculated as net income divided by revenue, or net profits divided by sales.
Let’s simplify that further: it’s how much a company profits from sales, after business costs.
To understand how profit margin influences your AdWords budget, first, you’ll need to have an idea how the competition apparatus behind it works.
Here’s a simplified and condensed explanation:
AdWords lets business ads appear on the first two or three positions in search results pages through a complex bidding system. Assuming all quality metrics are equal (and we’ll talk about that more in the future), if a competitor outbids you for a keyword, their ad will be placed above yours in search results.
For businesses in market sectors where a single solid lead can translate to a large business value (i.e. business setup, legal advice and assistance, consultancy), the budget for a Google advertising campaign can get very high.
“In industries where the profit margin is very high, advertisers tend to bid higher until they hit the breakeven point,” claims Nabeel Rabbani, head of USEO’s Performance Media team.
Factor #4: Seasons
“For some businesses, seasons dictate demand.”
You don’t look for summer clothes during winter time, and you don’t shop for coats and boots in summer.
It’s as simple as that.
For some businesses, seasons dictate demand. When there are fewer searches for your products/services, Google won’t need to use your budget as much to show your ads. But during peak seasons, be ready to top up your account more often, or else your ads will stop showing.
If you want to know how to prep your ad campaign for busy seasons, check out our previous blog.
That about sums it up – let’s move on.
Factor #5: Customer Urgency
“It’s all about making sure you’re in the best position to sell your products/services.”
When you’re out on the shoulder lane of Sheikh Zayed Road, and you’re frantically trying to get roadside assistance on your mobile, you don’t have time to browse Google’s search results.
You click on the first ad you see, and dial that number!
In this case, position one is highly coveted because it dramatically increases a business’s chances of capturing new or repeat business. You’ll also need a higher budget if you want to get there because your competitors are also probably bidding for that spot.
On the other hand, if you’re doing online retail for mobile phones, getting that first spot is less of a priority.
Because there’s less urgency involved in the decision making.
People will check out your retail prices, check out your competitors’ prices, check if you offer free delivery, what payment options are available, etc. They’ll open new tabs and compare offerings.
In short, they’ll take their sweet time to get the best deal possible.
So you can have your ad on second or third spot, and still have a better return on your investment than your competitors. It’s all about making sure you’re in the best position to sell your products/services.
All that said, what are the key takeaways from this post?
Takeaway #1: Budgets are Variable
With all that’s been said, it’s essential to be flexible with your ad spending if you want to get the most out of your campaign.
Sometimes you’ll have to increase your spending to capture more customers. Other times, your monthly budget won’t get exhausted because not enough people are searching for you.
That’s the nature of business – it fluctuates. Be ready to adjust with it.
Takeaway #2: Expect Uncertainty
When you sign up for an advertising campaign, you’re given an estimated budget by your AdWords specialist.
And that’s exactly what it is – an estimate. A projected spend.
It’s the result of a careful and methodical calculation of your campaign’s cost, but an estimation nonetheless.
And just as no one can really predict the future, your AdWords specialists can only make calculated estimations as to how much your campaign might cost.
In the end, the actual budget required might be slightly higher or lower.
So be ready for uncertainty.
“When you enter [a] market, you cause a ripple by yourself. You’ve also increased the approximate cost per click; you are suddenly also bidding competitively. So there’s a certain level of uncertainty about how much you should spend.” – Anna Bayer, USEO AdWords Specialist.
So the next time you wonder why your AdWords specialist is asking you to bump up the budget a bit, or why you need this set amount to jump start your campaign, you’ll be better informed.
Have questions for us? Need expert insight on a topic? Have ideas you want to share? Let us know what you think in the comments section below!
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