Many business owners getting into paid marketing ask, "How much should I spend on Google Ads?"

While a common expectation is to receive a specific number—like $1,000 a month or $50 a day - there is a better appraoch. Rather than fixating on specific amounts, let’s explore a simple formula that helps you determine what you can genuinely afford to spend on Google Ads.

The Pitfall of Short-Term Thinking

A common mistake businesses make is assessing their Google Ads success based solely on the first sale. For instance, if you spend $50 to acquire a customer, but that customer only buys a $100 product, you might think you’ve made just $50 in profit. This thought process leads to the belief that Google Ads are not viable for your business.

Take, for example, a skip bin business. If they looked solely at the profit from one skip bin hire, the ads would seem prohibitively expensive. However, a builder doesn’t hire just one skip bin; they rent one every month for an entire year!

By only evaluating the first transaction, you risk underspending and losing ground to competitors that grasp the importance of the long-term view.

The LTV to CAC Ratio

To build a more effective budget, consider using the LTV to CAC ratio. If you're unfamiliar with these terms, here’s a quick breakdown:

• LTV (Lifetime Value): The total revenue you can expect from a customer throughout their relationship with your business. This usually factors in the average order value, purchase frequency, and profit margin.
• CAC (Customer Acquisition Cost): The total amount spent to acquire a customer.
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Let’s say your average customer spends $100 each month for 12 months. That makes the total value of one customer $1,200. If your margin is 25%, your LTV is $300 (25% of $1,200).

Now, suppose you spend $3,000 on Google Ads and attract 30 customers. Dividing $3,000 by 30 gives you a CAC of $100.

With LTV and CAC in hand, you can better gauge how much to invest in Google Ads. The ideal ratio typically suggested is three times your CAC to your LTV.

If customers are worth $300, you can afford to spend up to $100 to acquire them, maintaining the healthy ratio of 3:1. This allows you to cover other business costs while still gaining a profit.

Conversely, if you’re spending only $50 to acquire a customer worth $300, then you’re practically generating money effortlessly with a 6:1 ratio.

Reframing Your Budget

Once you understand how much you can spend to acquire a customer based on your LTV, the question shifts.

Instead of asking, "What’s my monthly budget?" the focus becomes, "How many customers can I acquire at $100?"

As long as you stay within your calculated ratio, the potential for scaling your Google Ads budget is limitless.