Your AdWords budget is a little different then a traditional marketing budget because it changes based on your average order value and your cost per conversion.
Think about it: if you got $50 for every $40 you spent, how big of a budget would you want to have? You would want to have the largest budget you could possibly have because the more money you spend, the more money you make right?!
Traditional advertising budgets spent on billboards, TV or magazines have no way of knowing how much money is being made back on your investment – hence the reason for having a budget.
Below is my AdWords Budget Calculator built in excel for calculating the sweet spot for your budget. Feel free to download it at the bottom of this post.
So the first thing you need to decide is how much a sale is worth to you – weather it’s the worth of one lead, the margin you make on a sale, or the value of a visit – I call it the average order value. Next, you determine your cost per conversion. This is derived by cost divided by conversions. If you’re just starting out you won’t know what this metric is in your AdWords account since you need to accumulate some clicks and conversions. But you can still use the tool to make a goal for your cost per conversion.
Once you start playing around with the calculator you’ll see the relationship between these metrics and your revenue. The more you can decrease costs to get that average order value to go up, and the more you can optimize your AdWords campaigns to get that cost per conversion down – the more revenue you make. Obviously no matter how large of a budget you have, at some point there won’t be enough demand, in the form of searches triggering your ads, to allow you to continue to make more money. This is where expanding your keyword lists comes in and the process starts all over again.