Getting Started with Google AdWords: How to Determine Your Test Budget

If you’re considering launching a Google AdWords campaign, then you may be asking yourself, “How much do I need to invest to test this out?  Is $100 enough or do I need thousands?”
It’s an important question and I hear it all the time from prospective clients. Unfortunately, this question is impossible to answer without further research.  For example, we need to answer the following:

1. Which keywords will you be targeting and how much do they cost per click (CPC)?
2. What is the time frame for your test? Do you need to see results in weeks, months, or a year?
3. What is your sales process and typical sales cycle?  Do customers buy the same day they search or does it take months before a purchase is made?
4. What are your typical sales conversion rates?

Let’s go through an example and at the end you’ll know how to estimate a reasonable budget to test a Google AdWords campaign.

Find Your Target Keyword CPCs

In a Google AdWords search campaign, you pay per click.  That means you only pay Google when a prospect clicks on your ad.  If your ad shows up in Google’s results 1,000 times, but no one clicks on it, then you don’t pay a penny.  That’s why AdWords is sometimes called PPC, or pay per click advertising.
So if we’re estimating our budgets, we obviously need to know how much it’s going to cost when prospects click on our ads. And the exact amount you’ll pay depends on the keyword you’re advertising on.  For example, if you advertise on the keyword, “coffee shop,” then you’ll pay a different amount than if you advertise on “mortgage broker.”  Google estimates you’ll pay $2.90 for “coffee shop” and a whopping $13.76 for “mortgage broker.”
That’s a HUGE difference when we’re estimating budgets.
Now, you may be wondering how the heck do you find all the CPCs for keywords.  It’s actually really easy because Google provides you with the Keyword Planner Tool.  Search for your target keywords and the Keyword Planner tool will give you an estimate for how much each keyword will cost per click.  Note that these are estimates so you may pay more or less.

Testing Time Frame

It’s important to realize that you need to go into an ad campaign with a realistic time frame in mind.  As you’ll see later, the time frame will depend on your budget and it also depends on your industry.  There simply may not be enough search volume for your target keywords to get leads and sales data in 1 month.  For example, “mortgage broker” is searched 9,900 times per month in the US.
If 1% of the searchers click on your ad, then you would get 99 clicks from that particular keyword.  Is it realistic that you would get a sale from only 99 website visitors?  Probably not.  Of course, you’ll be targeting more than one keyword.  The goal here is to make sure there is enough search volume for your target keywords to achieve your goals within your time frame.  Plus, if you have a longer time frame, then you can spread out your monthly budget across multiple months.

Your Sales Cycle

This step is easy.  What is your typical sales cycle?  If it’s over 1 month, then obviously you’ll need to test for multiple months to get decent data from a test campaign.  If your customers buy within 1 day, then you know you’ll get almost instant feedback from the campaign once it starts.

Your Sales Conversion Rates

The final step before we can calculate your budget is to use your sales conversion rates.  In my example above, we estimated that we can drive about 99 prospects to our website from the keyword “mortgage broker.”  There are at least two more conversions that need to take place:

1. Prospect has to call, complete a webform, or visit your office after clicking on the ad
2. You have to close the sale

Let’s say your goal is to get the prospect to complete a webform to schedule an appointment.  A reasonable conversion rate for lead generation like this might be 5%.  So out of the 99 visits, about 5 will schedule an appointment.  I’ll assume 100% will show up for the appointment, which is not realistic, but makes this example easier. :)
Next, is your appointment to client close ratio.  Let’s make the math easy here and say you’re sales conversion rate is 20% (and the sales cycle is only a few days) so you would generate 1 new client.

Estimate Your Test Budget

Alright, now it’s time to put all this information together to estimate your test budget.  We already estimated we can generate 1 new client from 100 clicks on a targeted keyword.  Plus, we know our example keyword costs $13.76 per click, so it’s going to cost about $1,376 to generate one sale.
That means we need at least $1,376 for our initial test to get a sale within about a month, based on the CPC, search volume and sales cycle.  So if you only have $100/month to test, then it’s going to take about a year to test just one keyword.  It’s possible you’ll get a sale more quickly, but it’s also possible it will take longer than estimated to get that first sale.  In this example, I would recommend a budget of at least $2,000 to give this one keyword a fair shot.
As you can see, there are a lot of variables that go into estimating your AdWords test budget.  Play around with the Google Keyword Planner to find your target keywords’ CPCs and search volume.  Then run the numbers based on your sales cycle and conversion rates.

Or, contact me and I’ll do it for you! :)

Quality Score Explained by former Google Employee

With the continuing expansion of ad space at the top of the page (from ad extensions like sitelinks with descriptions), it’s more important than ever to make sure your ads have a great ad rank. But CPCs are on the rise – so unless you can improve your conversion rate so you can increase bids, Quality Score (QS) optimization may be your only way to maintain a high rank without breaking the bank.
While I’ve been a panelist representing Google in Quality Score sessions at more conferences than I can remember, I’ve been meaning to put together some of my insights on the topic for a broader audience. So, here goes….

The Evolution Of Quality Score

Even if you don’t care much for a history lesson, it may help paint a picture of why QS exists in the first place, and the evolution of factors may give you some insight into what Google cares about.
When I started working at Google in 2002, Quality Score didn’t exist. But what set Google apart from the other PPC ad systems at the time was how they determined if ads were relevant enough to warrant an impression. In addition to having a team of humans reviewing all ads, the system was also monitoring the click-through rate (CTR) of every keyword — if a keyword’s CTR fell below 0.5%, it would become disabled for poor relevance. Google was using the wisdom of the crowds to let its users determine which ads should show and which shouldn’t.
The problem with disabling keywords at an arbitrary CTR level was that advertisers were unhappy to see some of their keywords disabled forever (unless, of course, they knew of the workaround to resubmit the same keyword with different capitalization). So, we started to evolve the system. Instead of disabling keywords, we came up with new statuses like “slowed,” “in trial” and “on hold.”
The idea was to give advertisers a way to fix low-relevance keywords by giving them a small allowance to run ads that were considered poor quality so that they might prove otherwise. We also gave the system more flexibility so there wasn’t a hard cutoff at the 0.5% CTR level. Ultimately, though, most advertisers still saw keywords they really wanted to advertise on get disabled, and they remained displeased.
Google addressed this with the introduction of the minimum bid. Rather than flat out disabling keywords, they asked advertisers to pay more for keywords that had low relevance — the idea being that eventually, it would make no sense for an advertiser to keep paying the high cost-per-click (CPC), and they’d either optimize the relevance or delete the keyword.
In today’s system, the minimum bid has been engulfed by the first page bid, which also takes into account competition. It’s a little harder to see the direct correlation between what you pay and the quality score, but the connection’s definitely there.
Below is an example of where we see the correlation between the average CPC and the QS in our Quality Score Tracker tool.

As the Quality Score starts to increase, the average CPC in this campaign starts to drop.

Quality Score’s Impact On Ad Rank

When Google launched AdWords Select and started to shift from CPM-based pricing to CPC-based pricing, they couldn’t afford to lose all the revenue from their CPM program (which was called AdWords at the time). They were still a pretty small company, and Yahoo/Overture was a formidable competitor. So, to ensure revenue was maximized, they ranked ads in the CPC program according to a very simple rule:
Ad Rank = Max CPC * CTR
If you take a minute to look at this more closely, you’ll quickly see that ad rank is, in fact, equal to CPM or dollars-per-impression. This was the simple but brilliant insight that made AdWords so powerful — advertisers only had to pay when they got clicks, users would see more relevant ads because ads with high CTRs were more likely to appear high in the results, and Google was making as much money as possible from these ads.
The equation for ad rank is a whole lot more complicated these days and now includes thresholds for appearing at the top of the page, landing page factors, and more. But at the heart of it, the original principle still applies: if Google can show more relevant ads, they will get more clicks, have happier users and make more money. And, the key component for achieving this is CTR.
The importance of CTR to Quality Score is a bit like the importance of TF-IDF to SEO. While there are hundreds of factors that go into ranking in paid or organic search, these long-established principles are still some of the most important ones. In the 80/20 rule, these are your 80 percent factors and the first ones you should pay attention to.

Factors Of QS

While I’ve explained that CTR is a main driver in QS, it’s useful to understand how Google thinks about CTR. After all, there are many things that influence the CTR you see in your account such as the device, the network, or the position of your ad on the page. Thus, the average CTR you see in your account is not the CTR Google uses to determine Quality Score.
To make sure advertisers have a level playing field, they evaluate small slices of CTR.
For example, they look at different CTRs by device type so that your performance on mobile won’t affect your performance on desktops. They also have a different CTR they look at for the Display Network and Google Search — a good thing, since CTR on Display is usually much lower, and you wouldn’t want that to hurt your QS for search.
Where possible, they also favor looking at the CTR when the keyword in your account matches the search query exactly (don’t confuse this with the “exact match” keyword match type), and they normalize the CTR based on the number of ads on the page and your ad’s position amongst them.
Furthermore, Google has to make some guesses before they have a statistically significant amount of CTR data for new accounts, new keywords and new ads, and they do this by evaluating the CTR at different levels as explained in the diagram below.

The various levels at which Google evaluates CTR to determine Quality Score.

As you can see, there are 3 levels of CTR evaluation: the account, the keyword and the ad. These CTR elements are all combined into a secret formula and out comes your keyword-level Quality Score and the corresponding number between 1 and 10 that you can see in your account.

How Quality Score Is Set For New Keywords

When a keyword is new in an account, there is not a strong historical element for how the keyword performs with its ad text (factor 3), so the QS is mostly based on system-wide data for that keyword in all other accounts. That gets combined with data for how this particular account and its ads have performed historically. If these elements have good QS, the new keyword is likely to also start off with a better QS.
To give an example, if you have 2 accounts, you should see a lower starting min bid in the account with the better account-level QS. If you have 2 domains, you will see a lower starting min bid when using the domain that has a better QS.
After the system gets enough data about more specific things, like how the keyword performs with the ad you wrote for it, it will rely much more on this to determine the Quality Score. This is why it’s so important to have great account structure and split up your ad groups in a way that allows you to create great performing ad texts for each grouping of tightly related keywords.

Other Relevance Factors

According to Hal Varian, Google’s Chief Economist, QS also considers “relevance” in addition to CTR. But what does that mean? The easiest way to think about this is once again based on click-through rate — but, rather than using CTR to generate the QS number between 1 and 10 that you see for each keyword in your account, it’s used at the time a user does a search to determine if there are any correlations between that user’s search and your ad that could predict the CTR (Google’s Quality Score is a predictive system that tries to predict CTR for each ad and each query). Some examples:

1. Did the user’s search include some additional words, and do those correlate with your ad’s expected chance of getting clicked? E.g., if you have a job website and want to advertise on the keyword [jobs], your ad is probably not relevant when someone searches for “Steve Jobs.”
2. Does the location of the user have any correlation to your predicted CTR? E.g., if your business is in the US and the searcher is in Belgium, perhaps it’s less likely your ad will get the click because the users may prefer a business closer to them.
3. Does the time or day of week influence your predicted CTR? E.g., Google may know that users are less likely to click on your ad on a Tuesday.

These factors let Google assign you a real-time quality score which they can use to better rank your ad for that particular query. There could be many other “relevance factors,” but just know they’re all based on the same principle of trying to predict the likelihood of your ad getting a click based on something Google knows about that specific query.
While the lack of transparency into the factors may be annoying, this relevance component has helped advertisers by automatically giving them more good clicks and fewer bad ones.

Landing Page Quality Score

The landing page is one of the newer factors used for QS. Landing Page Quality (LPQ) started as a way to counteract bad sites that duped users into clicking their ads and hence had a good CTR but a lousy user experience. Now that LPQ can also improve your QS, it’s getting a lot more attention from advertisers (probably more than it warrants).
Remember, the CTR of your ads is still the bigger QS factor and probably the better thing for most advertisers to focus on optimizing. Every now and then, I hear of advertisers who are spending a ton of time creating one landing page per keyword so that the keyword will appear on the page and score a better LPQ. That’s probably overkill — Google is very good at understanding how words are related, so it’s unnecessary to include every variation on the page.
My personal recommendation is to also keep a close eye on bounce rates and time on site, two metrics you can see directly in AdWords when you link it with Analytics. A high bounce rate or very short time on site both provide a great way for you to find keywords that are not relevant in the minds of users.

Optimizing The Right Elements Of Your Account

If you haven’t guessed by now, optimizing Quality Score is really all about optimizing for CTR. The challenge is to optimize for the right CTR. For example, because Google uses position normalization when determining how your CTR impacts your QS, it could very well be that your ad with a 15% CTR in the top position on Google is actually worse than your 3% CTR ad in the last place on the right side of the page.
You should also look at the impression-weighted Quality Score to determine which keywords and ad groups are most in need of an optimization. I shared a script for automating the calculation with AdWords Scripts.

The Most Important KPI For A Performance Marketer

Many performance marketers continue to consider click-through rate (CTR) as a key performance indicator of their search campaigns’ effectiveness and evolve their PPC optimization strategy around that.
At the end of the day, what matters most is achieving the best ROI given your business objectives and budget, and you might optimize directly to CTR or ROI or a combination of success metrics to achieve that.
In order to have the best optimization strategy for your SEM campaigns, it is important to understand and quantify the influencers of ROI.

The Two Extreme Optimization Strategies

There are two types of strategies performance marketers consistently use as their campaign optimization strategy:
1)    Optimizing To A CTR Goal
One of the main factors influencing Quality Score (QS) is CTR, which affects your cost-per-click (CPC) and in turn affects your ROI. An increase in QS due to a boost in CTR would lower CPC and improve ROI.

2)  Optimizing To An ROI Goal (Revenue-Per-Click & Cost-Per-Click)
Direct optimization to revenue or a conversion metric is a common strategy amongst performance marketers. Making sure an intelligent bid management is in use will be crucial to your campaign’s success.

While perhaps no marketer purely optimizes to CTR or ROI, they tend to skew towards one of these camps. Each method has its pros and cons. A CTR strategy will get you more clicks but does not guarantee the highest ROI. A purely ROI approach will get you the highest ROI but you potentially lose out on customers early in the sales funnel who might eventually convert.

ROI Breakdown

ROI equals Revenue-Per-Click (RPC) over Cost-Per-Click (CPC). Data analyzed from over two dozen advertisers using econometric methods (a simplified version of the equation is shown below) shows that 34% of ROI is influenced by RPC and 66% by CPC.
Bid management is by far the most important influencer of ROI. Forty-nine percent (49%) of ROI is influenced by bid management, 13% by other factors (i.e., marketplace, seasonality, etc.), and 4% by CTR. The data show the importance of having an intelligent bid management strategy in place for your SEM campaigns. But, does this mean a CTR maximizing strategy is a wasted effort?

A Deeper Dive Into The Relationship Between ROI & CTR

Previous studies have looked at the relationship between CTR & ROI by purely relying on correlations. A correlation analysis alone cannot determine the effects of CTR on ROI, and a more robust statistical technique is required to answer that question. These techniques enable us to control for all the factors that can potentially influence ROI.
From the chart below, we do see a relationship between the CTR & ROI — but not a very strong one.


Applying statistical modeling techniques will allow us to quantify any statistically significant relationship between the two if it exists.
In this model, I control for position, CPC, industry, and bid management differences across the different advertisers in the data in addition to CTR.
The results show that there is a statistically significant relationship between CTR and ROI; but in terms of impact, it’s quite small. For a 10% increase in CTR, expect to see a 1.2% increase in ROI. This means that if you increase your CTR from 10% to 11% for a campaign with an average ROI of $5, the ROI will increase to $5.06 due to the improvements made in CTR.

Key Takeaways For Performance Marketers

• Campaign managers should utilize both strategies above in optimizing their campaigns; main focus should be on ROI but do not completely ignore CTR
• 49% of ROI is influenced by bid management; intelligent bidding is integral to a campaign’s success
• CTR does have a small but statistically significant impact on ROI; a 10% change in CTR affects ROI by 1.2%

In Summary

Focus on optimizing your SEM campaigns for ROI but keep an eye on CTR. There is no need to purely optimize to CTR as it influences only 4% of ROI; but, it is important to account for it in your longer term strategy and make sure healthy CTR rates are met and maintained.
Intelligent bid management heavily influences ROI and is absolutely necessary to ensure your ROI goals are met.

Before You Quit Pay-Per-Click, Follow These PPC Tips

The thought of advertising your small business is both exciting and unnerving.  Many business owners are proactive when it comes to marketing their own business, using pay-per-click (PPC) advertising for instant results. When business owners try to handle their own PPC ,  they can spend  hundreds or even thousands of dollars on pay-per-click advertising  only to see little return on their investment.
Before you give up on PPC, consider the common mistakes that business owners make when managing their own advertising campaigns:

1. Having Unrealistic Expectations
2. Not Checking the Terms They are Actually Paying For
3. Not Adding Negative Keywords
4. Creating Ads Without Keyword Relevant Landing Pages

Having Unrealistic Expectations

Small business owners need to be broken out of the traditional advertising mindset.  For years, small business owners advertised on printed media, radio, and television. They are used to seeing and hearing their own ad constantly.  With  PPC advertising,  your ad will not be up 24 hours a day, 7 days a week. Often, business owners will set up a PPC campaign, search their keyword, and not find their ad. When this happens, their first thought is, “Where is my ad? This is not working!” PPC is a lot different than traditional advertising.  You pay for performance.  
There are a few reasons why you might not be seeing your ad:

1. Your ad  might have already been clicked on a few times today. Once you reach your daily budget, your ads will stop running for the rest of that day.
2. You may be targeting too many keywords or not the right keywords.  In general, the more specific the keyword, the better the results. See my post on longtail keywords.
3. Your daily budget may be too small. If your spending less than $10 a day, your budget might not be enough to provide meaningful results.

Not Checking the Keyword Details (Query String Report)

When I have talked to small business owners that manage their own PPC, I was surprised to learn how few people actually use this. The keyword details are the actual search terms that you paid for. You can also think of this as keywords driving traffic.  Lots of valuable information can be found in this report. You can quickly see if you are wasting money or may see opportunities for new keywords. Hands down, this is my #1 PPC tip.
Here is how you can see the query string report:

Click on the keywords tab.

Select all keywords to see every search term that you paid for.

Click on view keyword details.

See which search terms are actually driving traffic. Notice that this list doesn’t exactly match your keyword list. Look for keywords that will never result in new business and add them as a negative keyword.

When you look through this report, you should ask yourself one question- could this search term result in business?
For example,  I was recently looking at a PPC campaign for a maid service company. One of their targeted keywords was “housekeeping.” I looked at the query string report and I saw that she had a lot of traffic coming from people searching for “housekeeping jobs.” The business owner was paying for this traffic and didn’t even know it. I also found something rather amusing.  One of the search terms was “arnold schwarzenegger housekeeper”. I am not sure why a person searching for this ended up clicking on an add for maid service; perhaps it was an accident. Anyways, after I checked the query string report, I added 71 negative keywords to this campaign. One was “jobs” and the other was “arnold schwarzenegger”. with the addition of negative keywords, the business owner does not have to worry about paying for these terms that will won’t result in a sale.

Not Adding Negative Keywords Every Month

This is somewhat repetitive to the step above, but it is so important I wanted to break it out into its own section.  Negative keywords are terms that you don’t want to advertise for.  This is almost as important as choosing the words you do want to advertise for.
Let me illustrate with an example. If you own a carpet cleaning service, you might have “carpet cleaning” and “cleaning service” as keywords. Without negative keywords, someone searching for “window cleaning service” might see your ad and call you to find out that you don’t offer window cleaning.  Not only is this annoying for both the customer and the business owner, it also eats up your PPC budget.
Many small business owners running their own PPC campaigns don’t create a negative keyword list.  PPC platforms like Adwords and adCenter are designed for anyone looking to get started ASAP. There are few requirements in the actual interface. You need a budget, some keywords, and an ad with a landing page.  Because negative keywords are not required, most small business owners don’t set them up. Adding negative keywords will make your campaign much more effective by spending your budget only on keywords that will drive  new business.

Creating Ads Without Keyword Relevant Landing Pages

One of the biggest mistakes is not having the actual keyword you are targeting on your landing page. For example, say you are an HVAC company. You have a home page that talks about your company with some marketing language about “why choose us.”  You want to advertise your business when people search for “Water Heater Repair In Houston,” but no where on your home page do you have those keywords in that order. This is like shooting yourself in the foot. If you want to get results for this keyword, this is how you should up your campaign:

1. Sign into Adwords and create a campaign. Set your daily budget and target your ads to be shown in Houston.
2. Create an ad group called water heater repair.
3. Add keywords specifically about water heater repair (water heater service, water heater not working, broken water heater, etc.)
4. Add negative keywords related to this service (jobs, etc)
5. Create ads specifically about water heater repair.
6. Create a landing page specifically about water heater repair using the keywords from step 3.

Follow the above tips to get the most out of  your PPC, increase conversions, and drive potential customers to your website. You’ll enjoy the boost to your bottom line that a properly executed PPC campaign can create!