This post comes to us from the BoomTown blog:

Google Adwords for many of our Boomtown clients has and continues to be an awesome source of high quality leads and traffic. We get a lot of questions from clients about Adwords, and many of these revolve around budgeting.

How Is My Budget Spent?

Everyone needs to start somewhere, and to determine how much to spend it's important to understand how Google actually spends your budget. Unlike traditional media formats, Adwords is a "self-serve" ad platform with auction based bidding. What that means is 24/7/365, advertisements, per-click bids, budgets, and competitors are constantly changing. Available inventory is not sold or distributed evenly. Your budget is spent on a CPC or Cost-Per-Click basis, which means you only pay when someone clicks on your ads.

What's My Cost-Per-Click?

Google's auction based system takes into account several factors in determining what you pay per click on an ad. Important factors are the number of competitors, their max CPC bid, search demand for the keyword, previous account performance, and the budget of the accounts in the auction. The effects of previous performance and budget on click costs can be a little confusing to new advertisers, so let's look at a different example of how this works.

Imagine you own a bar. Customers come in everyday and purchase drinks at the prices you set. Some customers are new and may never come in again, while others are regulars and come in daily. Would you be more willing to give discounts on drinks to a person that you may never see again or someone you know will come in and most certainly repay the favor?

Google operates under a similar principle. Say we have an advertiser (A) bidding $10 per click with a $20 budget vs. advertiser (B) bidding $1 with a $100 budget. Assuming their ads get similar click through rates, competitor (B) has more potential to generate revenue, and will be given a greater share of traffic or reduced click costs. Advertiser (A) is willing to pay more per click, but can only spend a maximum of $20 which is less than advertiser (B). This is a very simplified example, but the key takeaway is the number of available slots where ads can be shown is limited. Ads are placed based on their relevancy to a search, and their potential to generate revenue.

How Much Should I Spend?

Our most asked question. Based on the info above, I hope to have shown you that there is never a one-size-fits-all answer. Your market's average CPC, account history, and current performance can make these determinations. In many cases, campaigns are actually limited by their budget. What does that mean? If your campaign is limited by budget, then your ads will stop showing for that day. Limits work on a daily basis Ex: $500 = $16.66 per day. An example of this is shown in the chart above.

So is the secret to simply spend as much as possible? Not necessarily, but remember budget limits how many clicks can be potentially generated per day. A small budget combined with high click costs gives fewer chances for a conversion, which could increase your cost per lead.

Have questions about your budget? Talk with your success manager, and get the right strategy to help your campaign be successful.

To view the original article, visit the BoomTown blog.