How Much Should You Spend on Google Ads? The Question Your Agency Answers Wrong

The Wrong Answer Everyone Gives

"You should spend 10-15% of revenue on Google Ads."

This is the most common answer to the most important question in paid search. It is also completely wrong.

Percentage-of-revenue budgeting assumes that every pound of revenue is equal, every product has the same margin, and every customer is worth the same amount. None of these things are true.

Why Percentage-of-Revenue Fails

Different products have different margins

A brand selling a £100 product with 60% gross margin has £60 to play with. A brand selling a £100 product with 25% gross margin has £25. Spending the same percentage of revenue on both is economically incoherent.

Different channels have different roles

Google Ads might be your primary acquisition channel or a supplementary one. The right budget depends on what role it plays in your commercial strategy, not on a generic percentage.

Revenue is not profit

Spending 15% of revenue sounds conservative until you account for COGS, VAT, shipping, and returns. On a 30% gross margin product, 15% of revenue is 50% of your gross profit. That is not conservative. That is aggressive.

The Right Framework

Instead of "what percentage of revenue," ask: "what is the maximum cost per acquisition that preserves our target contribution margin?"

This requires knowing:

1. Average order value (AOV)
2. Cost of goods sold (COGS) per order
3. Shipping cost per order
4. VAT per order
5. Return rate and cost of returns
6. Payment processing fees
7. Target contribution margin percentage

Subtract items 2-6 from item 1, then apply item 7. The remainder is your maximum allowable CPA.

Working Through an Example

AOV: £75 COGS: £22.50 (30%) Shipping: £4.99 VAT: £12.50 Returns (25% rate, effective cost): £4.69 Payment processing: £1.65

Contribution before CPA: £28.67 Target contribution margin: 15% of AOV = £11.25

Maximum CPA: £28.67 - £11.25 = £17.42

Now you have a real number. Your Google Ads budget is whatever spend level achieves a £17.42 or lower CPA on average. That might be £20,000. It might be £80,000. The percentage of revenue is irrelevant.

The Diminishing Returns Curve

Once you have your maximum CPA, the next question is: at what spend level does your average CPA exceed that threshold?

Every Google Ads account has a diminishing returns curve. Early spend captures high-intent, low-competition traffic at efficient CPAs. As spend increases, you reach into more competitive auctions and less qualified audiences. CPA rises.

Your optimal budget is the point where marginal CPA approaches your maximum allowable CPA. Beyond that, every additional pound spent generates less profit than the one before.

The Seasonal Dimension

Your optimal budget changes throughout the year. During peak demand (Black Friday, seasonal highs), competition increases but so does conversion rate. Your maximum CPA may stay the same, but the volume available at that CPA changes.

Budget should flex with opportunity, not sit at a fixed monthly level. A rigid £50,000 per month budget means overspending in quiet periods and underspending during peaks.

What to Tell Your Board

When your board asks "how much should we spend on Google Ads," the answer is:

"We should spend up to the point where our marginal cost per acquisition exceeds our contribution margin threshold. Currently, that optimal spend level is £X per month, generating £Y in contribution profit."

That is a commercial answer. "15% of revenue" is a guess.

If your agency cannot model your diminishing returns curve and tell you where your optimal spend ceiling sits, they are managing a budget, not a P&L.