"How much should I spend on Google Ads?" is one of the first questions every business owner asks, and it's usually answered badly. Most advice defaults to a flat percentage of revenue, a number that has nothing to do with your margins, your average order value, or how competitive your industry is on cost per click.
Here's a better way to think about it.
Stop Starting With a Percentage
Percentage-of-revenue rules of thumb (spend 5–12% of revenue on marketing, for example) are fine as a sanity check, but they're a terrible starting point. A business with 65% margins and a $400 average order value can profitably support a very different budget to one with 20% margins and a $60 average order value, even if both make the same revenue.
Your budget should come from your numbers, not an industry rule of thumb.
The Real Inputs: Margin, AOV, and Close Rate
Before you set a budget, you need three numbers:
- Average order value (AOV) — what a typical customer is worth on their first purchase.
- Gross margin — what's left after cost of goods or service delivery, before marketing spend.
- Close rate — if leads go through a sales process, what percentage actually convert to paying customers.
From these, you can work out your maximum sustainable cost per acquisition (CPA), the most you can afford to pay for a customer while still being profitable.
Maximum CPA = Average Order Value × Gross Margin %, then divide by your close rate if leads need to be sold before they become customers. If your AOV is $500, margin is 40%, and close rate is 50%, your break-even CPA is $500 × 0.40 ÷ 0.50 = $400. In practice, you'd target well under that to stay profitable, not just break even.
Three Budget Bands for Australian Businesses
Once you know your target CPA, your monthly budget is largely a function of how many conversions you need and how competitive your keywords are. As a general guide, most Australian small-to-mid businesses fall into one of three bands.
| Stage | Typical monthly spend | What it's for |
|---|---|---|
| Testing | $1,500–$3,000 | Validating which campaigns, keywords, and offers actually convert before scaling. |
| Growth | $3,000–$10,000 | Scaling proven campaigns, expanding keyword coverage, and adding new match types or networks. |
| Scale | $10,000+ | Defending category-leading keywords, running multiple campaign types, and competing at volume. |
Common Budgeting Mistakes We See
Most wasted ad spend doesn't come from bad targeting. It comes from budgeting decisions made before a business understands its own numbers. The most common mistakes:
- Spending too little to learn anything. Under roughly $1,500–$2,000 a month, most accounts simply can't gather enough data to optimise properly.
- Cutting budget after a slow week. Google Ads needs a stable spend level to exit the learning phase. Constant on/off budget changes reset performance.
- Ignoring margin when setting target CPA. A "good" cost per lead means nothing if it's higher than what that lead is actually worth to the business.
- Judging performance too early. Four to six weeks and 30–50 conversions is the minimum before a budget decision should be made either way.
How We Approach Budgets at RO Digital Labs
Before we recommend a number, we work backwards from your margins, average order value, and sales process to find a target CPA that's actually profitable, then size the budget to how competitive your keywords are and how fast you want to grow. It's the same framework outlined above, applied to your real numbers instead of a rule of thumb.