How much should I spend on AdWords?
I’m often asked this question by people in the construction industry. Here’s how to work out your AdWords budget:
1) Estimate the size of a typical sale. Often clients say they’re unsure – “it’s between £30 and £3000 depending on the customer.” But it’s really important to work out the average size of an order and come to a single value. Your accountants may be able to help you with this. Let’s say it’s £300.
2) Work out the rough gross profit on a typical sale. If your average gross margin is 30% i.e. £90 then you may be willing to spend £30 to acquire the order. This is your cost of sale.
3) Of course once you’ve acquired the customer they’re far more likely to re-order from you if they’re happy and if you keep marketing to them.
4) This means the customer may be worth, for example, two orders per year for five years so they’re worth £900 (£90 x 2 x 5). Plus for every 100 new customers, five new customers are recommended to you. So the value is really £900 plus 5% – £945 in profits.
5) Based on the above and on a quick and dirty basis (stop smiling) you can play with the numbers to calculate what you think a new customer is worth. Then work out what it’s worth to you today -a £945 profit over five years may be worth only £200 to you right now. You can calculate this value either by making a guess or using a discounted cash flow model.
6) Next trial an AdWords campaign with a relatively small budget over 60-90 days. Work out whether the costs to acquire a new customer (or a good quality sales lead) are less than how much you’d now calculated you’d be prepared to pay for a new customer.
7) If the costs per sale or sales lead are too high stop the campaign immediately and try to identify the causes. There are obvious seasonality issues in construction. You can look at these at http://www.google.com/trends/. A campaign that is unprofitable in January may go like a rocket in mid-summer or vice-versa.
8) If the cost of acquiring a new customer is less than you’re prepared to pay expand the campaign. How much? Well that depends on your cash flow (especially if you have long sales cycles). But if the campaign is profitable and cash flow is positive you can keep expanding the campaign in a series of steps – each of which can be tested for profitability.
9) You can then expand the campaign geographically targeting different towns, regions and countries. Each on a step by step basis.
10) Eventually most companies will either run out of capacity to service demand – so you’ll need to cut back – or you’ll saturate the market for searches for your services. When this happens you’re unable to spend any more on the campaign.
If you’re running multiple marketing campaigns e.g. email, social media, mailshots etc. always devote all your marketing budget to the most profitable channel and when this is max’ed out devote the rest of the budget to the next most cost-effective channel. In this way you’ll get the biggest bang for your construction marketing budget.
Even if your stats are pretty inaccurate it’s much better to use them as a guide to your marketing than just a budget with which you feel comfortable. Don’t worry if you feel uncomfortable working with this level of uncertainty. You’ll be allocating your budget far more efficiently than most of your competitors.
These principles apply to just about any sector be it – finance, tourism or business services.