How Much Can I Spend On Google Ads?

calculate cost per click in google ads
Home » Blog » How Much Can I Spend On Google Ads?
Table of Contents
    Add a header to begin generating the table of contents

    One of the first questions I get when talking about google ads is how much is a click? It’s a fair question, but asking it is the wrong way to think about advertising via Google Ads. This is an expense focused question and the whole purpose of engaging a Google Ads management agency or getting started with it on your own is to generate revenue. With that in mind, a better question to ask is, how much can I afford to spend on Google Ads clicks to acquire a customer profitably? Well there’s a simple answer to that question and there a more complex answer to it. In this post we’ll dive in to some of the math that goes behind what you can afford to spend on Google ads.

    Simple Cost Per Click Calculation

    Remember how I told you there’s an easy way to calculate how much you can afford to spend on pay per click? Well here it is. You can afford to spend your gross profit. You can afford to pay up to your gross profit times your conversion rate for a click on average. Let’s say you make $100 in revenue and your cost of goods sold (COGS) is $30. That would mean your gross profit is $70. If your ads convert at a 3% conversion rate then you can afford to pay $2.10 per click on average.

    $100 Revenue - $30 Cost of Goods Sold = $70 Gross Profit
    $70 Gross Profit * 3% conversion rate = $2.10 Cost Per Click

    This is the theoretical maximum available customer acquisition cost you can afford to spend without losing money. Of course running a business often has a goal of making some money along the way, so it’s a good idea to bake in a desired profit into your calculations. Let’s say you have a target profit margin of 20%. In our simplistic example we would want to add that desired profit figure to our cost of goods sold when calculating what we can afford to spend to acquire a customer.

    $100 * 20% Desired Profit Margin = $20 Desired Profit On Sale
    $100 Revenue - $30 Cost of Goods Sold - $20 Desired Profit = 
    $50 Available Acquisition Expense
    $50 Available Acquisition Expense * 3% conversion rate = 
    $1.50 Cost Per Click

    The $50 available acquisition expense above is rolled up into a line item on income statements called selling, general, and administrative or SG&A. Cost per click expenses to acquire sales are similar to the cost of a salesman doing the selling offline. It’s important to understand that every business is going to have general and administrative expenses for things like running payroll, managing vendor relationships, and other items not related to the production of goods. These general and administrative expenses are spread out over the cost of your entire sales volume and usually wind up being negligible in the context of calculating cost per click, but you may want to factor in some additional breathing room to cover general and administrative expenses.

    Introducing Customer Lifetime Value

    In the real world most sales are not going to be exactly $100 and the lifetime of a customer will typically extend past the initially placed order. To describe this, pay per click experts and marketers like to look at a metric known as average customer lifetime value (ALCTV or sometimes CLV or LTV). Established businesses with adequate record keeping should be able to look at historical customer records and get an estimate of what the lifetime value of a customer may be. For instance a managed service provider acquires a customer that purchases an initial fixed fee project for $4,000 and also signs a $1,500/month ongoing managed services contract and remains a customer for 2 years.

    $1,500/month * 24 months + $4,000 Initial Project = 
    $40,000 Customer Lifetime Value

    Additional considerations can be made such as if acquired customers go on to refer additional customers that add to the lifetime value, but often times such a granular and speculative look is omitted.

    Let’s say that between fractional usage of help desk employees, network engineers, cloud engineers, and other resources that it costs the business approximately $20,000 of salaried employee’s available utilization to service the account. That would leave a $20,000 customer acquisition cost. Subtract out a desired profit margin of 20% and a 5% cushion for general and administrative expense.

    $40,000 x 20% Profit Margin = $8,000
    $40,000 x 5% General & Admin = $2,000

    $40,000 Customer Lifetime Value – $20,000 Cost of Goods Sold – $8,000 Profit Margin – $2,000 General & Admin = $10,000 available acquisition expense.

    Cost Per Lead Calculation

    Our cost per click calculation above makes sense for ecommerce business where a conversion translates directly to a sale and revenue. For service business there is usually an extra layer involved because every conversion is going to generate a lead and not necessarily a sale. Service business are going to need to get a handle on another metric known as their lead to close ratio. In our customer lifetime value example above where we show a $10,00 available acquisition expense for a managed service provider it would be a huge mistake to multiply your acquisition expense by your conversion rate and assume that’s a fair cost per click. You also need to factor in your lead to close sales rate. This can vary wildly depending on how picky the business is about qualified leads. The further up market you move, the more likely it is your lead to close sales rate drops. Let’s say the close rate here is 20%.

    $10,000 Available Acquisition Expense * 3% Conversion Rate 
    * 20% lead to close rate = $60 Maximum Cost Per Lead

    A SaaS company will have a similar calculation, but you can sub out leads for free trials or demo requests and “close rates” for subscription rates.


    Google Ads can be a powerful channel to generate business from, but it requires getting a firm handle on the value of a customer, realistic profit margins, and additional non production expenses that fall under the general and administrative categories. Google Ads provides lots of great tools to help you generate conversions at a desired cost. We went through several calculations for determining realistic cost per clicks and costs per lead in this article. These were just example numbers and can be significantly influenced by increasing conversion rates, revising profitability targets, increasing your lead to close sales ratios, or increasing lifetime customer values. Working with an experienced marketing consultant can help you make decisions that contribute to gains in many of these areas. Reach out to Tortoise and Hare Software today for help getting started with Google Ads.

    Share This Article
    Posted in: ,

    Hunter Nelson

    Hunter is the founder and president of Tortoise and Hare Software, a digital marketing agency for B2B technology companies. Hunter has more than 10 years’ experience building web applications and crafting digital strategies for companies ranging from scrappy startups to Fortune 50 household names. When not on the clock, you'll find him spending time with his family and pups, relaxing on the beach, or playing competitive online video games. See LinkedIn for more.

    Leave a Comment

    Table of Contents
      Add a header to begin generating the table of contents

      Free Email Course:
      Launching Your B2B Digital Marketing Program

      Enroll in our free digital lead generation crash course. A 60 day email series with twice a week emails walking through the journey of how to launch your digital marketing program and generate more B2B leads from your website. Unsubscribe at any time.

      Recent Posts
      msp marketing guide to 5 million+ ARR

      MSP Marketing Guide To 5 Million+ ARR

      In this guide, we’re going to talk about how you can use MSP marketing to generate enough pipeline to get to 5 million plus in annual recurring revenue. A lot of the things we’ll talk about in this guide can be used in larger and smaller businesses but for the purposes of this guide, we’ll…

      multi arm bandit

      Multi Arm Bandits And PPC Machine Learning

      In today’s post, we’re going to be talking about a common PPC machine learning algorithm of which some variant is leveraged in part by many pay per click platforms called a multi arm bandit. We’ll talk about how they compare to simple A/B tests and why understanding the types of algorithms these platforms use is…

      online lead generation tips for msps

      Top Online Lead Generation Tips For MSPs

      According to industry research by a leading managed service provider marketing firm, 94% of MSPs self-reported lead generation as their number one challenge when it comes to growing their MSP. There’s no question that the vast majority of MSPs struggle with lead generation, especially in the earlier years of their business. It makes sense, most…

      Top Content
      sample brand kit

      Branding Your MSP: How To Get Started

      Throughout the process of launching and running Tortoise and Hare Software these past 3-4 years there’s one thing that I’ve gotten consistently good feedback on. The brand! People who aren’t shopping for marketing, and have no relationship to the company will regularly come up to me at trade shows, or comment on my business card,…

      msp paid search campaigns

      The Ultimate Guide To Paid Search On Google Ads For Managed Service Providers

      Generating leads for your MSP can be a challenge. You spend so much time managing employees, making sure customer support tickets are answered, procuring hardware, and defending against cyber threats, there’s hardly time to worry about networking and doing things like posting on social media. However, you’d like to grow faster, and due to some…

      msp seo ultimate guide

      The Ultimate Guide To MSP SEO

      Search Engine Optimization (SEO) is one of the most important ways to attract new business for mid-market managed service providers (MSP). If you look at MSPs that have achieved any sort of meaningful scale and grown to the 10MM ARR mark and beyond, you will almost always see a significant portion of their growth came…

      About Us

      Tortoise and Hare Software is a boutique B2B tech marketing agency. We help companies like MSPs, SaaS providers, cybersecurity firms, and other technology service providers launch their digital marketing programs and generate inbound leads.