Is Google Ads Right for your Business?
Finding people who are searching for what you sell is only the first part of the equation.
Google Ads also needs to make financial sense.
If a new customer is worth £500 to one business and £25 to another, those businesses cannot sensibly compete for traffic in exactly the same way. Before setting a budget, you need to understand what a customer is worth and how much you can afford to spend to acquire one.
Lesson Objective
By the end of this lesson, you should understand customer value, allowable acquisition cost, conversion rate and the relationship between cost per click and profitable advertising.
Start with the value of a customer — not your Google Ads budget.
One of the most common mistakes small businesses make is deciding how much they want to spend on Google Ads before understanding the value of the outcome they are trying to generate.
A daily budget of £10, £50 or £100 means very little on its own. The important question is whether the advertising can acquire customers at a cost that makes commercial sense.
Your advertising budget should come after the economics — not before them.
First understand what a customer is worth. Then determine what you could afford to pay to acquire one. Only then does it make sense to think seriously about campaign budgets.
What is a customer worth?
For a simple one-off purchase, customer value may be close to the value of the transaction.
But revenue alone is not the same as profit. If you sell a product for £100 and the direct cost of fulfilling that sale is £60, you do not have £100 available to fund advertising.
In other businesses, the first transaction may only represent a small part of the customer's total value.
- A subscription customer may continue paying for months or years.
- A professional-services client may buy several services over time.
- An ecommerce customer may return and make repeat purchases.
- A tutoring student may book multiple sessions rather than just one.
This is why understanding customer value is so important. Businesses with higher customer value can often afford to spend considerably more acquiring customers.
How much can you afford to pay for a customer?
Your maximum acceptable customer acquisition cost — often shortened to CAC — depends on your margins, overheads, repeat-purchase behaviour and the amount of profit you want to retain.
You should not simply spend up to the total gross profit available from a customer. Advertising is only one business cost, and you still need the sale to contribute profit.
The Core Numbers
Three numbers help you judge whether Google Ads can work economically.
01
Gross Profit Per Customer
The revenue from a customer minus the direct cost of delivering the product or service.
Customer Revenue × Gross Margin
02
Target Acquisition Cost
The amount of gross profit you are prepared to invest in acquiring the customer.
Gross Profit × Acquisition %
03
Maximum Cost Per Click
Your approximate affordable click cost based on the percentage of visitors who become customers.
Target CAC × Conversion Rate
Worked Example
A business with a £500 customer value
Average customer revenue
£500
Gross margin
60%
Gross profit per customer
£300
Percentage of gross profit available for acquisition
30%
Target customer acquisition cost
£90
Website conversion rate
5%
Approximate affordable cost per click
£4.50
Interactive Exercise
Calculate your own Google Ads economics.
Enter some approximate figures for your business. These do not need to be perfect — the aim is to understand how the economics interact.
£
Use expected lifetime value if repeat business is a meaningful
part of your model.
%
Approximate percentage left after the direct cost of delivering
the product or service.
%
This is your chosen proportion of gross profit, not a universal
benchmark.
%
For lead generation, use the percentage of paid visitors who
become customers — not merely enquiries — where possible.
Gross Profit Per Customer
£300.00
Target Acquisition Cost
£90.00
Approx. Max CPC
£4.50
What does this mean?
With these assumptions, a customer generates approximately £300 gross profit. If you are prepared to invest 30% of that gross profit in acquisition, your target acquisition cost is about £90. At a 5% visitor-to-customer conversion rate, that supports an approximate cost per click of £4.50.
The calculator does not tell you what Google will charge.
It tells you what your own economics may be able to support.
You can then compare that figure with the likely cost of traffic in your market.
If your economics suggest you can afford £5 per click and relevant traffic typically costs £2, there may be plenty of room to test.
If your economics suggest you can only afford 40p per click while relevant traffic commonly costs several pounds, the opportunity becomes much harder.
This is why two businesses advertising on the same keyword can get
very different results.
The business with stronger margins, higher customer value or better conversion rates can usually afford to compete more aggressively.
Conversion rate changes everything.
Imagine two businesses can both afford to spend £100 acquiring a customer.
Business A converts 2% of paid visitors into customers. Business B converts 5%.
Business A can afford roughly £2 per click. Business B can afford roughly £5 per click.
Nothing about the product value or acquisition target changed. The difference came entirely from the conversion rate.
This is one of the reasons landing-page quality matters so much in paid search. Improving conversion can materially change what you can afford to bid.
Do not mistake revenue for available advertising budget.
A £1,000 sale does not mean you can afford to spend £1,000 acquiring it. Account for the direct cost of fulfilling the sale, other operating costs and the profit the business needs to retain.
Equally, do not automatically undervalue a customer by looking only at their first purchase if repeat business is an important part of your model.
Lesson Quiz
Check your understanding
Answer the three questions below.
1. Why should you understand customer value before deciding your Google Ads budget?
2. If your target acquisition cost is £100 and 5% of paid visitors become customers, what is the approximate maximum cost per click?
3. Which change could allow a business to afford a higher cost per click without increasing its target acquisition cost?
0/3
Lesson takeaway
Google Ads only works commercially when the value generated by a customer can support the cost of acquiring them. Understand customer value, gross profit, acquisition cost and conversion rate before deciding how aggressively you can compete for paid traffic.