Solved: Setting Initial Google Ads Budget for E-Commerce

Hi there,

Thanks for reaching out! Happy to give you some initial thoughts on how to approach setting a budget for a new Google Ads campaign, especially when you're starting from scratch with no historical data. It's a common question, and honestly, the way most people answer it is completely wrong.

They get bogged down in metrics like CPC estimates or AOV, but that's like trying to navigate a ship by looking at the waves instead of a compass. The real answer isn't a simple number; it's a strategic calculation based on your specific business economics. Let's walk through how to actually figure this out properly.

Why CPC Estimates and AOV are a Trap...

Right, let's get this out of the way first. When you're setting up a new campaign, Google will happily give you keyword CPC estimates. It feels helpful, but it's a bit of a trap. These estimates are broad averages and tell you absolutely nothing about the *quality* of the click you're buying. A £0.50 click that never converts is infinitely more expensive than a £5 click that buys from you repeatedly. Google's job is to get you to spend money on clicks; your job is to turn those clicks into profit. Their interests are not perfectly aligned with yours.

Basing your budget on these figures is like deciding how much to spend on a house based on the average price of a single brick. It's a data point, but it's missing all the context.

Then there's Average Order Value (AOV). This is a step in the right direction, but still deeply flawed on its own. Let's say your AOV is £100. Great. But what's your profit margin on that £100 sale? If you're selling handcrafted jewellery with an 80% margin, you make £80. If you're selling electronics with a 10% margin, you only make £10. The amount you can afford to spend to get that £100 sale is vastly different in those two scenarios. AOV without margin is a vanity metric. It tells you how much revenue you're getting, but not how much money you're actually *making*. And you cant pay your bills with revenue.

Focusing on these surface-level numbers is the number one reason new advertisers burn through their budget with very little to show for it. We need to go deeper and build your budget on the solid foundation of your business's actual profitability.

You'll need to calculate your Customer Lifetime Value (LTV)...

This is the single most important number you need to know before you spend a single penny on ads. The question isn't "how low can I get my cost per click?" but "how high a cost can I afford to acquire a truly great customer?". The answer is locked inside your Lifetime Value (LTV).

LTV tells you the total profit you can expect to make from a single customer over the entire duration of your relationship. For an e-commerce business, this includes their first purchase and all subsequent repeat purchases. A customer who buys a £50 product today but comes back four more times over the next year is far more valuable than a customer who buys a £100 product once and never returns.

So, how do we calculate it? It's simpler than it sounds. You need three bits of information:

• -> Average Revenue Per Account (ARPA): What's the average amount a customer spends with you per month? For e-commerce, you might calculate this by taking your total revenue over a period (say, a year) and dividing it by the total number of unique customers in that period, then dividing by 12.
• -> Gross Margin %: What's your profit margin on that revenue? This is crucial. It's (Revenue - Cost of Goods Sold) / Revenue.
• -> Monthly Churn Rate %: What percentage of your customers do you lose each month? This is the trickiest for a new business. If you have no data, you might have to start with an industry average (e.g., 5-10% for subscription e-commerce) or make a conservative estimate and refine it later. It's calculated as (Customers Lost in a Period / Customers at Start of Period) * 100.

The calculation is then:

LTV = (ARPA * Gross Margin %) / Monthly Churn Rate

To make this tangible, I've built a little calculator for you. Play around with the numbers to see how small changes, especially to your churn rate and margin, can dramatically impact what a customer is worth to you.

Once you have this LTV figure, you have your north star. You now know what a customer is actually worth to you in profit. This knowledge changes everything about how you approach advertising.

I'd say you should determine your Maximum Affordable CAC...

Now that we know our LTV, we can work backwards to figure out the absolute maximum we can afford to spend to acquire a customer. This is your Customer Acquisition Cost, or CAC.

The relationship between LTV and CAC is the fundamental health metric of any business that uses paid advertising. A common benchmark for a healthy, scalable business is a 3:1 LTV to CAC ratio. This means for every £1 you spend to acquire a customer, you should be getting at least £3 back in lifetime profit.

• -> 1:1 ratio: You're losing money on every sale once you factor in other business costs. Unsustainable.
• -> 2:1 ratio: You're likely breaking even, with little room for error or profit. Very risky.
• -> 3:1 ratio: This is a healthy place to be. You're profitable and have money to reinvest in growth.
• -> 4:1+ ratio: You're doing great and should probably be spending more aggressively on advertising to grow faster!

So, the calculation is simple: Max Affordable CAC = LTV / 3

Using the default numbers from the calculator above, if your LTV is £600, your target CAC would be £200. This means you can afford to spend up to £200 to get one new customer and still maintain a healthy business model. This £200 figure is your new guardrail. It's infinitely more powerful than a vague CPC estimate because it's directly tied to your business's profitability.

Suddenly, the conversation shifts. It's no longer "our CPCs are £3, that feels expensive!". It's now "we can spend up to £200 to get a customer. How can we build a marketing funnel that achieves that?". This is a much more strategic and empowering position to be in.

We'll need to look at your Funnel Conversion Rates...

Okay, so we have our Max Affordable CAC. But that's the cost for a *final sale*. People don't just land on your site from an ad and buy instantly. They go through a funnel. For a typical e-commerce site, it looks something like this:

Ad Click -> Website Visitor -> Product Page View -> Add to Cart -> Initiate Checkout -> Purchase

At each step, people drop off. This is normal. The percentage of people who complete the final step (Purchase) out of everyone who initially clicked the ad is your overall funnel conversion rate. For a new e-commerce store, a conversion rate of 1-2% is pretty typical. A well-optimised store might see 3-5% or higher. Let's be conservative and assume a 2% conversion rate for now.

This conversion rate is the bridge that connects your Max CAC to the metric you actually control in Google Ads: your Cost Per Click (CPC). If you know you can spend £200 to get a customer (your Max CAC), and you know that only 2% of clicks will turn into a customer, you can calculate the maximum you can afford to pay for a single click.

Max Affordable CPC = Max Affordable CAC * Conversion Rate

Using our example: Max CPC = £200 * 2% = £4.00

This is your magic number. You now know that you can bid up to £4.00 per click and, *as long as your conversion rate holds at 2%*, you will acquire customers at your target £200 CAC. Any click you can get for *less* than £4.00 is pure profit potential. This is how you make decisions inside your Google Ads account. Not based on Google's vague suggestions, but on your own business math.

Here's another calculator to help you see how your website's conversion rate directly impacts what you can afford to pay for traffic.

You probably should structure your initial campaigns for learning...

So now we have a target CPC. Does that mean we can just set a huge budget and let it rip? Not quite. Remember, we have no data yet. All our calculations are based on assumptions (like that 2% conversion rate). The first goal of any new ad campaign is not to make a profit. It's to buy data and validate (or invalidate) our assumptions as cheaply and quickly as possible.

Think of your initial budget as a research and development spend. You're paying Google to learn:

• -> Which keywords actually drive converting traffic versus just window shoppers?
• -> Which ad copy resonates with your target audience and gets them to click?
• -> Which of your products are most appealing to a cold audience?
• -> What does your actual website conversion rate look like from paid traffic?

To do this effectivly, you need to structure your campaigns for learning. For a new e-commerce client, I'd typically recomend a mix of campaign types to test what works:

1. Standard Shopping Campaign: This is your bread and butter. It puts your products directly in front of people searching for them. You'll want to structure your ad groups by product category or even by individual SKUs if you have a small catalogue.
2. Performance Max (PMax): This is Google's automated campaign type. It can work brilliantly, but it's a bit of a 'black box'. You give it assets (images, videos, copy), and it runs ads across all of Google's networks (Search, Display, YouTube, etc.). It needs a good amount of data to work well, so it's good to run alongside other campaigns initially.
3. Search Campaign (Brand): A campaign bidding only on your brand name. This is crucial for capturing high-intent traffic and protecting your brand from competitors who might bid on your name. These clicks are usually cheap and convert very well.
4. Search Campaign (Non-Brand): This targets keywords related to the products you sell, e.g., "womens leather boots" or "eco-friendly cleaning products". This is where you find new customers. It's vital to group your keywords into tight themes (ad groups) so you can write highly relevant ad copy.

Your goal in the first few weeks is to get enough clicks through each of these campaigns and ad groups to make informed decisions. You need enough data to see which areas are performing and which are just wasting money. This is where we finally get to the question of the daily budget.

So, what should your starting daily budget be?...

Your initial daily budget should be large enough to get you data quickly, but not so large that you're risking a huge amount of money on unproven assumptions. A good rule of thumb is to aim for a budget that allows you to get at least 10-20 clicks per ad group per day.

Why this number? Because anything less, and it'll take you forever to reach statistical significance. If you're only getting 1-2 clicks a day, it could take months to know if an ad group is a winner or a loser. We need to speed up that feedback loop.

So, here’s the final calculation for your *starting* budget:

Initial Daily Budget = (Number of Ad Groups) x (Clicks Per Ad Group Per Day) x (Estimated CPC)

Let's say you start with 5 ad groups in your non-brand search campaign. You want to aim for 15 clicks per ad group. And let's assume a conservative estimated CPC of £2.00 (you can get this from the Keyword Planner, but take it with a huge grain of salt).

Initial Daily Budget = 5 ad groups x 15 clicks x £2.00 CPC = £150 per day

This £150 isn't a number plucked from thin air. It's a calculated investment designed to buy you roughly 75 clicks per day, spread across your test ad groups, giving you meaningful data to analyse within a week or two. You would then set seperate, smaller budgets for your Brand and Shopping campaigns based on the same logic. Maybe £20/day for Brand and £50/day for Shopping to start. This gives you a total starting budget of £220/day.

How soon should you adjust the budget?...

This is where patience is a virtue. The single biggest mistake new advertisers make is tinkering with their campaigns too often. Google's algorithm needs time to learn. If you keep changing the budget, bids, and targeting every day, it's like trying to teach someone to drive while constantly grabbing the steering wheel. You're just confusing the system.

Here’s a simple timeline for adjustments:

• First 72 hours: Do nothing. Seriously. Don't touch it. Let the campaigns exit the "learning phase". You might see volatile performance. This is normal.
• Week 1-2: Analyse performance. You're not looking for massive profits yet. You're looking for signals. Are there keywords with a high Click-Through Rate (CTR) but no conversions? Maybe the landing page is the issue. Are there ad groups that have spent 2-3 times your target CPA without a single sale? It's probably safe to pause them. Are there certain products in your Shopping campaign getting all the clicks and sales? Those are your winners.
• After Week 2: Now you can start optimising. This is when you begin to adjust budgets. The process is simple: shift budget from the losers to the winners. If Ad Group A is getting sales at your target CAC and Ad Group B is burning cash, you don't need a higher overall budget. You just pause Ad Group B and give its budget to Ad Group A. You scale up what's working and cut what isn't.

Budget adjustments shouldn't be massive, sudden leaps. A good rule is to increase the budget of a winning campaign by no more than 20% every few days. This prevents you from shocking the algorithm and re-entering the learning phase. It's a gradual process of feeding the winners and starving the losers.

I've detailed my main recommendations for you below:

This is the main advice I have for you. It's a framework for thinking, not just a set of instructions. Following this process will put you miles ahead of most new advertisers who are just guessing.

As you can probably tell, this is a lot more involved than just plugging a number into the 'daily budget' box. It requires a bit of financial modeling, strategic campaign structure, and disciplined analysis. It's a process that can feel overwhelming when you're also trying to run a business.

We've run this exact playbook for numerous e-commerce clients, helping them navigate this initial learning phase and scale profitably. For instance, one campaign we managed for a women's apparel brand achieved a 691% return, and another for a niche map store brought in an 8x return by applying these core principles. The process works, but it demands expertise and focus.

If you'd like to walk through these calculations with your own numbers and get a second pair of expert eyes on your specific situation, we offer a completely free, no-obligation initial consultation. We can review your business goals and help you build a launch strategy that's built for long-term success, not just short-term clicks.

Hope this helps give you a much clearer path forward!

Regards,

Team @ Lukas Holschuh