What are the best formula to determine you much to spend on Google ads?
Hello Taborton, thank you for your question and welcome to the Shopify AMA, I’m your host, Emmanuel from FeedArmy.
That is very difficult to say, but the first step would be to check what you are comfortable paying for at least 1 or 2 months. For example $50 per day, knowing that if something fails, you can pay for $50*60.8.
If you know you can not pay $50 per day, then go lower. But not too low.
And it also depends on how many products you have. If you are going to be drop shipping thousands or even hundreds of products, $50 is not enough.
If you have just a couple of products $25 per day is even enough to start with.
Then scale as you see more sales and profits come in.
But here is kind of a formula you could follow:
Formula:
Budget = (Target Sales × Target ROAS) ÷ Average Conversion Rate
Then check if it’s profitable:
Profit = (Revenue × Gross Margin) − Ad Spend
Example:
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Target sales: $100,000
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Target ROAS: 400% (4× return)
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Conversion rate: 2%
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Gross margin: 40%
Budget = (100,000 ÷ 4) = $25,000
Profit = (100,000 × 0.4) − 25,000 = $15,000 net profit
Hi Taborton,
At the beginning I always start with a small budget and watch the incoming results. As the campaigns keep on growing, I am adding budget.
With Pmax you need to be very careful because if you give to much budget to a campaign, Google might overspend it especially if the ROAS target is low. Once an account become bigger I am splitting campaigns so I have much better control over the spending.
When splitting campaigns it also needs to be done carefully so the algorithm does not go into a shock and slows down the traffic.
Let me know if you have a specific scenario where you need advise in.
All the best!
Careful with the formula above. Budget = (Target Sales × Target ROAS) ÷ Conversion Rate doesn’t hold up: multiplying by ROAS makes the budget go up as your returns improve, and conversion rate is already inside ROAS, so it’s counted twice.
The one that works is: Budget = Target Revenue ÷ Target ROAS.
Want £50k in revenue at 3x? That’s £16,700 in spend.
The part that actually matters is where Target ROAS comes from. It can’t be a number you like the look of. It has to sit above your break-even ROAS, which is 1 divided by your contribution margin. Keep 40% after product cost, fees and shipping and you break even at 2.5x, so a 3x target leaves you a real but thin margin, and a 2x target is a plan to lose money on schedule.
Start with your margin, get break-even, pick a target above it, then divide. Do it in that order and the “how much should I spend” question mostly answers itself.